IPOs – GETTING VERY UNCOMFORTABLE
By Ruma Dubey
Last year, Warren Buffett at the Hathaway AGM reiterated his revulsion for IPOs. When questioned about how people have struck it rich in some of the IPOs in USA, Buffett said, “ You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day but there's no reason to let that affect your investing strategy at all. You have to find what makes sense and follow your own course.”
And today, Rakesh Jhunjhunwala, whom the Indian media has penned at the ‘Indian Buffett’ he is staying away from IPOs as valuations have skyrocketed amid strong inflows and exuberance in equity markets. In fact at a Reuters Summit, he said point blank, “There is a lot of froth in the IPO market. Stay away.”
This obviously comes from the recent spate of new listings, which have been at a discount to the IPO price. Pricing is the problem – the knife which is killing the hen which lays the golden egg. Mind you, all these recent issues have excellent pedigree and going by the retail investor response to the issues, people were willing to buy despite the very expensive pricing. Retail investors are getting lured by “listing gains” only. And that too has come to a naught.
Take a quick look at the poor listings of recent times. Yesterday, Khadim India got listed – it had issued its shares at Rs.750 in the IPO, got listed on the BSE at Rs.727; a discount of over 3%. It is currently quoted at Rs.666 levels.
Day before that, New India Assurance made a very tepid debut on the bourses. As against the IPO price of Rs.800, it got listed on the BSE at Rs.748.90, a discount of over 6%. It is currently quoted at Rs.683.
Mahindra Logistics got listed on 10th Nov at Rs.432 v/s IPO price of Rs.429, a premium of less than 1% and soon slipped to Rs.416 levels. It is currently at Rs.422.
Reliance Nippon was different – it got listed at Rs.294 on the BSE v/s IPO price of Rs.252 but it is currently just about holding to a premium, quoted at Rs.258.
GIC was a big shocker – it got listed on the BSE at Rs.850 v/s the IPO price of Rs.912. It went down once to Rs.780 and is now currently at Rs.811.
What do all these recent listings show? The IPOs are being priced too aggressively, leaving very little or nothing on the table as profits. So what Buffett and Jhunjhunwala say is not wrong; the former does not simply believe in IPOs while the latter, for now, going by the poor listings feels that secondary market is a better bet. One third of the 30 IPOs that have the market this fiscal are today trading at a discount.
If one looks at the IPOs the way Buffett does, it makes perfect sense to stay away. These are all mostly Offer for sales. This means that the promoters and anchor investors are selling a part of their stake. They decide the price, they decide when to sell and they cash out. So how do we, the retail investor gain? This is unlike the secondary market, where the price of a stock is decided by the demand and supply and in that way is fairer.
Pricing has and will always continue to remain the one big decisive factor. For the past few years, it is high pricing which killed the IPO market; it singularly eroded investor profits and thus the confidence. Every issue which comes out today has pricing which outdoes the fundamentals of the company. After the high price of the IPOs there is virtually no gain left on the table for the investors. It is more prudent to buy the stock after it has got listed as very soon, after listing, many PE funds and HNIs make an exit, bringing down the price. Yes, PE funds and bigwig investors have become mere props to lure investors to the IPO and they in turn make a quick buck, leaving the rest holding a bag full of losses.
Remember the issue of Infosys? It came way back in 1993 and shares were issued at Rs.95/share. Today even when it is not exactly at its best, it is at over Rs.2000/share. HDFC Bank came out with an IPO in 1995 and it was priced at par, at an unbelievable Rs.10/share. It was oversubscribed 55 times! Yes, these were all issues way back when inflation and cost of living was not so high. But then are the issues of today priced right? Look at HDFC Standard Life IPO, which closed on 9th Nov and will get listed next week. It too priced its IPO very high at the Rs.290. Aren’t these expensive IPOs way ahead of the inflation? In fact they are adding on to the cost, raising the bar of inflation further.
People today have the money but nowhere to invest; or rather no genuinely affordable, value-for-money avenues to invest. Companies can truly build a strong investor base, that too loyal, if issues are priced at much lower levels, allowing people to make some money. And like always, we are the losers in this battle of greed and avarice.