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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