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Bobby
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Joined: 06/Sep/2006
Location: India
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   Topic: Precautions Before Investing in IPO
Posted: 11/Sep/2006 at 1:00pm |
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Hi Everyone,
I would like to know the precautions one need to take before applying for IPO.
Most of the time investment in IPO's gives you hefty returns.we don't make noise when we gain however it is only when we loose,we make hue & cry.
One such company where investors have lost is Shree Rama Multi Tech(FV Rs. 5) which was listed on 13 MAR 2000.It's 52 week high price is Rs. 29.70 and all time low is 4.45.
While others like educomp & everest kanto cylinders were listed in Dec/Nov 2005 at Rs. 125 & Rs. 160 and they are now trading at Rs. 513.50 and Rs. 438/- respectively.
I want to know how do we come at certain valuations for IPO.
How do we know that share coming for IPO is undervalued or overvalued??
Thanks.
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kulman
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Joined: 02/Sep/2006
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Posted: 11/Sep/2006 at 5:02pm |
It is like doing a normal fundamental analysis.
First of all read the company prospectus SEBI's website as well NSE/BSE have company prospectus. Try to understand as much as possible about the background and future plans. Some key points are listed below:
- Promoter's track record is very important. Check out www.watchoutinvestors.com for previous defaulter's list.
- Is it FPO or IPO
- Is it fixed price or book building?
- Promoter's history/background, is there any foreign collaborator/partner (it helps)
- Disclosure/compliance issues in the past, if any
- no. of years in the biz, size of company, past growth, growth in market share/profits
- Check for other income/unsuual income in the financial statements. Most have inflated figures for the recent past just to get rich valuations
- Ratio analysis (like Basantjee does it EPS/PE/PEG/ROE/ROCE/EBIDTA)
- Group companies and if there is any cross dealings/related party biz.
- Whether there are independant directors on board, is it a family biz?
- Promoter's holding post issue
- Issue price is not important but VALUE is.
- Peer group comparison
- VC/PE funds: are they exiting?
- Objects of the issue
- Fund deployment
- Govt approvals/licensing issues, environmental clearances etc, if any
Other members may add their own views.
Edited by kulman - 11/Sep/2006 at 5:06pm
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kulman
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Posted: 12/Sep/2006 at 7:48pm |
On this topic of IPOs/new issues, Warren Buffet has following to say:
The new issue market is ruled by controlling stockholders and corporations who can usually select the timing of offerings. Understandably these sellers are not going to offer any bargains. It's rare you'll find X being sold for half-X. Indeed, in the case of common-stock offerings, selling shareholders are often motivated to unload only when they feel the market is overpaying
Thats how we find that almost all the new issues come during massive bull rallies and leave very little for investors in terms of appreciation. Of course the price goes up upon listing, but that is thanks to the euphoria.
Edited by kulman - 12/Sep/2006 at 7:51pm
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Life can only be understood backwards—but it must be lived forwards
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omshivaya
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Posted: 12/Sep/2006 at 10:26pm |
I wouldn't generalize a theory without FACTS. "Very Little for investors". Let's take the last 3 years of IPOS and see how they peformed? You may be right and you may not be.
In a bear market not only IPOs, almost all stocks do badly. The segregation should be between good and bad stocks IPO has little to do with it.
Talking of euphoria, euphoria even drives other stocks up, not just IPOs.
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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it
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kulman
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Posted: 12/Sep/2006 at 11:23pm |
Please mark the words....I said almost all (not all). One should be extra careful because lots of promoters take advantage of bull runs & IPO fad.
Besides, true value of the stock cannot be determined by either by its IPO issue price or listing price. Finally, it all boils down to earnings & growth dear OmShivayjee.
Edited by kulman - 12/Sep/2006 at 11:24pm
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omshivaya
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Posted: 12/Sep/2006 at 11:58pm |
I know you said almost all and yes promoters do take advantage of bull runs. What I didnt agree on was your focus on only IPOs bcoz I feel you should do your research on every stock and its past growth and earnings and future outlook, irrespective of whether its a listed company or a company coming out with an IPO.
If what you say is true, it applies to all stocks not just IPOs is my point. Do the needed research on all stocks and not just IPOs.
Simple...dear kulman jee!
Edited by omshivaya - 12/Sep/2006 at 12:00pm
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The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it
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kulman
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Posted: 12/Sep/2006 at 12:13pm |
OmShivay jee
The topic of this discussion, initiated by abcd is "precautions before investing in IPO" so naturally here we are talking about IPOs.
And kindly read the first line of my first posting in this topic, which says..."It is like doing a normal fundamental analysis". We are not talking something else here that IPO and other listed companies have different yardsticks, which may please be noted.
Thanks
Edited by kulman - 12/Sep/2006 at 1:20am
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prosperity
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Posted: 12/Sep/2006 at 12:55pm |
Kulman,
I agree to you broadly, but what happens is that when bull markets run for a longer time like 2-3 years .. it has 2 impacts -
1) Some geniune companies with growth potential wants to go public and 3 years is good enough time for finding many such geniune companies to go public ...
Like Suzlon (It can be someone's long term bet - coz it has growth potential)
2) If economy continues to boom - the Earnings improves in next 2-3 years of listing because of GROWTH...
So higher PEs also gets fundamentally justified coz of growth prospects in a booming economy ..
But overall - for every good company, there are 10 companies where promotors get golden opputunity to gracefully offload huge stakes.
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