Intellectual Thoughts by Sanjay Panda: Darling's of Dalal Street in Despair

Darling's of Dalal Street in Despair

Indian investoer in the Indian equity market might as well agree with Sir John Templeton, the legendary US-born stock investor, given the current gloom that pervades Dalal Street. Before the bearish sentiment could set in, a large section of experts was busy justifying the boom in Indian equities - a boom that saw the benchmark indices earn nearly 50% returns last year. A major part of their reasoning was based on the paradigm that in India, things were different then, compared to the early '90s.

However, just as in times of plenty the rise tends to be stratospheric, the fall during lean times is sharp. While many experts have come up with a number of theories regarding well-established stocks, little or no attention has been paid to the darlings of the bourses last year - initial public offers (IPOs).

How have companies, which listed since the beginning of January '07, fared in the recent carnage witnessed on Dalal Street? Were they fairly priced or did they just take advantage of a booming market to claim outsized premiums? In order to answer these questions, we decided to engage in a detailed study of all recent IPOs.

In the 12 months ended March '08 (FY08), 84 companies were listed on the BSE, raising Rs 41,810 crore. We are, however, limiting our discussion to the IPOs that were listed in the calendar year '07. This gives enough room for the scrips of listed companies to stabilise their movement on the stock exchanges.

In '07, as many as 101 companies got listed on the bourses altogether, raising Rs 36,692 crore. This is phenomenal in all respects. The primary section of the Indian equity market has not seen such a high number of listings at least in the past seven years. Further, the amount of money raised in a single year was also the highest in '07.

Construction, inclusive of real estate, was the buzzing sector in terms of number of listed companies and the money they raised. With 16 companies collecting over Rs 15,000 crore from the primary market, this sector topped the charts (see adjacent table). The amount of money raised by the sector was largely skewed due to DLF's IPO, which raised more than half of the sum in May '07. Oil & gas and power were the other sectors that raised relatively large sums from the market.

IT was another sector that saw a large number of IPOs - as many as 14 - but of smaller ticket size. The difference this time round was that a majority of the companies were niche players with India-centric business models, against the pure IT services companies that had dominated the stage in previous years. Investors also seemed to welcome the change, as many of the issues of such niche companies were oversubscribed multiple times.

The change in the taste of investors is a fall-out of increasing macro-economic challenges for the plain-vanilla IT companies. The performance of these IPOs has been akin to a roller-coaster ride for investors, given that the time span between January '07 and April '08 encompassed a strong boom and an equally steep fall in the secondary equity market.

No wonder then that the market capitalisation of all the 101 companies as on April 7, '08 was just about a percent higher than their m-cap at the time of listing.

This, of course, takes into account the difference in the duration of returns. The difference arises because even though the date of calculation of returns - which is April 7, '08 - is fixed, the date of listing may differ from stock to stock. Nevertheless, this gives an insight into the performance of new listings.

While a majority of the companies were listed at a premium, not all of them could hold on to the gains. Out of 101 listed companies, 75 earned returns on listing. However, only 43 were able to retain their premium valuations as of the second week of April. This can be attributed to a steep decline in overall valuations following the market crash.

However, it needs to be noted that there were a handful of companies that were able to earn handsome returns for investors even in the post-crash scenario. There were 25 companies that were trading at more than 50% premium to their respective offer price as on April 7,'08. Further, the list also had 15 companies that saw a two-fold jump in their market cap, and five companies which saw a four-fold rise in m-cap. Hyderabad-based MIC Electronics topped the list of gainers. The stock is currently quoting at more than four times its offer price. It was followed by SEL Manufacturing, a Ludhiana-based cloth and garment maker and Allied Digital, a Mumbai-based IT infrastructure company.

The list of companies that eroded investors' wealth was dominated by textile companies. Out of 10 textile companies that were listed in '07, seven were trading below their offer price as on April 7. Moreover, three textile companies figured in the list of five biggest value destroyers.

Broadcast Initiatives, a Mumbai-based broadcasting company, topped the list. It lost over three-fourths of its value in a span of one year. For retail investors who have put their money in these IPOs over the past one year, the situation has changed significantly. Even though these IPOs rode the boom in the market, the recent market crash has put a question mark on their future performance. Hope these IPO's will generate returns in the long term.


No comments: