Avoid Chasing Listing Gains this IPO Season

Be it the primary or secondary market, it is always prudent to invest in companies whose fundamentals are sound as they will reward you in future, says Prashant Mahesh

    The IPO market is buzzing with activity these days. Three IPOs — from Bharti Infratel, CARE and PC Jewellers — are open for subscription. With the Sensex hitting a 19-month high of 19,562 last week, many investors believe subscribing to shares on offer through IPOs is a better way of taking exposure to equities than buying stocks from the secondary market. Some believe they can make a listing gain — buying shares during an IPO and selling for a profit when they get listed in the stock exchange — due to huge demand from institutional investors. However, the strategy doesn't always work. 
As per data from ETIG, of the 140 issues that hit the primary markets since 2009, 55 listed at a discount to their offer price on the very first day of trading. Even today, only 52 of these issues quote above their offer price. 
The balance 88 trade below their offer prices. While issues like MCX and MT Educare have given decent returns, there are several, like PTC India Financial Services and Indiabulls Power, that have disappointed investors. MCX, offered at . 1,032, now trades at . 1,545, a gain of 50%, while MT Educare, offered at . 80, trades at . 132, a gain of 60%. On the other hand, PTC India Financial Services, offered at . 28, trades at . 18, while Indiabulls Power, offered at . 45, trades at . 14. 
"The company and merchant bankers price an IPO at fair value. For an investor to make money, the company and management should deliver consistently over a period of time. Like they do for any company in the secondary markets, investors should check valuations, past track record of promoters and business model of the company before subscribing to an IPO," says Aseem Dhru, MD and CEO, HDFC Securities. 
"If you do your research and due diligence properly, there is a good chance of making money in an IPO. The only hitch is that quality issues are oversubscribed, and you get only a small allotment, which limits your gains," says Alok Churiwala, MD, Churiwala Securities. 
PLAYING THE LISTING GAME 
Due to the small issue size and high quality of a company, an IPO can often be heavily oversubscribed. In such cases, investors will get a very small allotment that will be an insignificant part of a portfolio. "In such a scenario, an investor would be better off selling the stock if it lists at a premium and taking the gains," says Churiwala. 
However, investors should not be looking to play the listing game, as it may not be easy for them. There have been many instances where socks get listed at a discount to their IPO price and drift even lower subsequently. For example, Raj Oil Mills, offered at . 120 in August 2009, listed at . 125, but, subsequently, the price crashed and it now quotes at a mere . 4. Similarly, Satluj Jal Vidyut Nigum (SJVN), offered at . 26 in May 2010, listed at . 28, but now trades at . 20. Hence, they would be better off investing on the basis of fundamentals. 
"If a stock is selected on the basis of fundamentals, then even if there are no listing gains, it can be held on and may reward you in future," says Alok Ranjan, portfolio manager, Way2Wealth. 
EVALUATING FUNDAMENTALS 
Analysts believe you should evaluate a company — be it in the primary market or in the secondary market — in the same way. It is important to check the fundamentals of a company before investing in it. 
Doing a fundamental check involves evaluating the financials, prospects of the industry in which the company operates and the pedigree of the promoters. CARE, for example, is the secondlargest rating agency in India, with banks such as IDBI, Canara and SBI holding 58.2% in it, while the Bharti Group is a leading business conglomerate with operations in telecom, retail, insurance and real estate. 
In terms of valuations, for CARE, the PE ratio based on the upper price band of . 750 is 17.9. Compared to this, its peer CRISIL trades at . 1,023, at a PE of 36.86; ICRA, another rating agency, trades at . 1,407, giving a PE of 23.26. 
Similarly, PC Jewellers also seems to be attractively priced. At the upper price band of . 130, it trades at a PE of 8.17. Its competitor TBZ trades at . 286, giving a PE of 38. Another important factor analysts look out for is the rate of growth. In case of Bharti Infratel, some analysts do not find its growth prospects exciting even though it is one of the largest players in the tower business. "We are cautious about the revenue growth potential. The wireless voice market has little room for expansion as most of the prospective locations have already been tapped. Though untapped rural voice market looks big in number, scaling in such locations would not be profitable in the medium term," says Daljeet Singh Kohli, head of research, India Nivesh Securities. He advises investors to be cautious and apply at the lower end of the price band of . 210 in Bharti Infratel. 
"CARE is reasonably priced, while Bharti Infratel could be bought post listing and PC Jewellers is a rub-off from the gold price surge, which long-term investors should stay away from," says Ashok Kumar, MD, Lotus Knowlwealth.