People have been asking me to write about Equity Research…and I cannot even make a list of topics in Equity Research, because it is too damn vast. So let me try to say what are risks that a common man / lay investor should avoid.

This is the first among them….

IPOs are priced in a very funny sort of a process. People who have not been on the other side of the equity table will be shocked to know how big IPOs get priced. It is a function of the promoter’s ego, market mood (boom or doom), the greed of the merchant banker, the willingness of the merchant banker to lose reputation…….oh ha the EPS, projected p/e etc are then ‘adjusted’ to suit the SELLER.

When you buy an IPO you are given a price (fixed price) or a range (book building). As an ordinary investor, the best thing to do is to ignore it. Completely. As soon as the share is listed, it will find its true level.

Let us take the example of 2 companies – Speciality Restaurants and Mahindra Holiday Resorts. SR came out with a public issue at Rs. 150, and there was a very big promoter holding and the issue got subscribed without much effort. When an issue opens above the issue price, it hurts the promoter – and I am sure he must have screamed at the Merchant Banker for pricing it cheap. Lo and Behold the share went to Rs. 210 – or maybe even higher. Then the quarterly / six monthly results started coming in. The cash flows were not justifying the price (I am not passing a judgement about the current price, this is not a buy/sell call).

Maybe the company is still in its investing mode, maybe there has been some heavy selling……….I am not getting into any of those stories. However the market discovered price (far far superior to the merchant banker decided high price) is Rs. 112 – half of the top price that the company saw and 70% of the IPO price.

Of course much worse was the pricing of Reliance Power. The company issues shares to the promoter at Rs. 16 and in a few months thought it worthwhile to price it at Rs. 450. I laughed at the price then, and said (check the past posts) that a price of about Rs. 75 was justified, not Rs. 450. Of course other than blogging or laughing one could not do much – I could not have put options of an IPO. Then of course all the bad news started coming in and then I did see the price at Rs. 75. At that point I was not willing to buy even at that price because a much better company like NTPC was available at Rs. 130/-

Look at Mahindra Holiday Resorts. Very small issue, reputed promoter, successful issue. Issue was priced at Rs. 300, then it shot up to Rs. 574. Then the results started coming in. I am still looking for the cash flow. Go to Google and you find the millions of unhappy customers, and ‘000s of happy customers. Sadly a million is greater than a thousand.

No cash flows, no price. Today the share price is closer to Rs. 200 and nowhere near the issue price.

Merchant bankers – the less said about them the better. Market is a fantastic pricing mechanism. So if you look at companies with say 15 quarters of rising EPS, or 3 years of increasing dividends, etc. etc. , has a market capitalisation of at least Rs. 5000 crores, and has decent promoters, do take a look. Look at the share price movement, if you are happy with the EPS, dividends, pe ration – this share is likely to be much much safer and better than a IPO,

Caveat: I have traded profitably in SR, MHRL and Reliance Power. Have shares of NTPC, and currently have no position in Reliance Adag.

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  1. Sir,
    As a budding investor, it would be great for me and people like me if you can write on the following topics :
    1. Identifying good companies.
    2. Arriving at a price range at which we should buy the company. Different methods for different types of industries.
    3. Spotting anomalies in the annual reports.

  2. Subra Sir

    This is indeed very helpful for those investors who are inclined towards investing in an IPO. I would like to know , however that if at all an investor is doing the valuation of a listed stock & is doing it well , shouldn’t he do the same for an IPO in order to decide whether to invest or not?

    Anmol Puri

  3. Thanks for the input. It is always a pleasure reading your posts and this one which gives negative side of IPOs is a good especially for beginners.
    But not all IPO’s are bad? How does one evaluate an IPO? Would love to read your take on it?

  4. Well written article, Subra sir.
    I personally made money in BGR energy and titagarh wagons IPOs.Now, looking back, i think it is pure luck and market mood.
    Also, I have lost money in reliance power IPO, sold @ 20-25 % loss.
    Later, i have decided largely to avoid IPOs.
    Though we may have to keep looking for good IPOs like Coal India, TCS etc.
    Hindsight bias ?

  5. From What I understand is IPO’s are much risky – stay away newcomers, but at the end you tempt us saying I have earned profit in almost all of them (Since its IPO post, I assume you have traded them in IPO).
    It would have been a learning experience for us if you would have told the % allocated (no number – small or big) to these risky IPO’s.

  6. Next in the queue would be Reliance Jio. Dont know when, but the day it hits it is time to dump all Reliance and purchase a year later

  7. Great article. Without knowing much about stock market, i invested a small amount in an IPO – Indosolar without reading anything. Invested at a share price of Rs.30 and now it is in Rs 1.80/- .

  8. Subra,
    IPO investing was profitable during the times of CCI who fixed a reasonable price. Then the markets opened up and we were expected to judge the fairness of the IPO price which was made by unscrupulous promoters and merchant bankers and an indulgent government.Fleecing of investors became a favourite pastime.Now nobody wants to invest in IPOs.
    What can be done is simple…..Make the merchant bankers buy shares from original allotees at issue price compulsarily for a period of 6 months from date of allotment.
    This will make them price the IPO reasonably.

  9. “Good Issues” like Coal India? lol…it came at an issue price of 300, now available at a huge discount, go and take it 🙂

    TCS yes, the Tatas decided to price it lesser than the price discovered…and people are refusing to sell it…so it will keep going up.

    good promoter, reasonable price: tough combination to find. Simple rule: keep away from IPOs.

  10. Advait

    What is a reasonable price? Rs. 350,000 for a ladies handbag? somebody is willing to pay that price.

    Or Rs. 123,000/- for a dental implant? Free pricing means exactly that. Either learn to read prices properly, go to a pro to get it done, or be lynched. Fair market.

    CCI by the way came with amazingly stupid prices if bribed well. Too many instances 🙂

  11. 1) Don’t invest in IPOs blindly.
    2) Go for :
    a) good management and companies with some advantage or differentiation and check for how that advantage stays with it.
    b) Able to understand the business and strengths/weakness/opportunities / threats etc.

  12. Subra,
    Free pricing does not mean loot by merchant bankers and companies. They conceal facts, give wrong facts, use illegal means to sell their ipo.
    Btw, all flop issues had an institutional quota which too was heavily subscibed. So what difference does a pro make……
    These chaps only learn if they r not able to sell the ipo and hence a retail investor should avoid issues marketed by a particular merchant banker who has overpriced previous issues
    Do any indian promoters with vanishing companies and their merchant bankers get punished?

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