Beware of hyped up public issues

The moral of the classic story by Hans Christian Andersen, The Emperor’s New Clothes, reveals how dangerous it is to be vain. There was an emperor who always loved to dress up. He was fooled by two tailors that they would stitch a suit from a fabric which could be seen only by those who were fit for their position. Though the emperor could not see the clothes himself, he pretended so.

And so did his courtiers for fear of being seen as unfit. The tailors pretend to drape the emperor who goes out in a procession wearing his ‘new clothes’. No one in the crowd sees any clothes but keep quiet for fear of being punished. Finally, it takes a child in the crowd to say that the emperor is not wearing anything. The emperor’s pride is shattered.

Let us see how this famous story works in the stock markets. Biocon tapped the capital markets in March 2005 and it was a highly hyped issue. The promoter (Kiran Majumdar Shaw) was projected as the demonstration of emerging woman power and she helped matters by typically walking a few feet above the ground. The issue did extremely well and the share is the only one in the list which has given positive returns. In a little over eight years when the Sensex is trading at 2.67 times, Biocon has returned 34 per cent.

Jet Airways was The issue in February 2005. The promoter’s ownership was the subject of a debate and it had a huge number of investment bankers to sell the issue. The promoter wanted to sell the brand separately and that became a talking point, which ultimately bombed and was sold for peanuts. The issue traded at a premium for a few months and then began its descent, from which it has never recovered.

Suzlon Energy tapped the markets in the inauspicious period of 'shraddh' when Hindus pay respect to the departed. The share had a good run for a couple of years and then its acquisition of companies in Europe caused its downfall. The share is yet to recover from its fall. This issue was also very well marketed by a large number of bankers.

DLF, in June 2007, was the real estate story of the century. The issue was marketed as India’s largest real estate player and land bank owner. DLF was also the first company to have ever paid a fine of Rs 1 crore to the market regulator, Securities and Exchange Board of India, for violation of minority shareholders’ rights in its earlier avatar.

The issue did well for a couple of quarters. But, once people understood land bank and real estate companies it was all over.

Reliance Power could be the reason for the beginning of the 2008 crisis in the Indian market. A galaxy of merchant bankers sold a power-packed story and also assured investors that the issue price of Rs 450 would list at four digits. If only words meant what were spoken, the market would be a different place. The issue bombed on Day One and this issue caused the largest loss of confidence among retail investors.

SKS Microfinance was touted as the messiah of the downtrodden. SKS was the company which would transform the lives of millions of poor Indians who could not approach banks for assistance. The issue did well for a mere 45 days and then all hell broke loose with the Andhra Pradesh government stepping in and regulating the industry. A stock issued at just under four digits is now trading in low double digits.

A2Z Maintenance was the issue where India’s Warren Buffet was the investor. It was in all the future businesses like solid waste management and green power. The share was very slickly marketed and had the ignominy of never trading at or above its issue price even once. The share is currently trading at less than a fourth of its price.

All these examples leave a common story for the public at large. Whenever something gets hyped and one is asked to step into someone else’s clothes to look at the picture, beware.

 

The author is founder, Kejriwal Research and Investment Services