Most highly graded public issues did not perform well this year; lost 30% money.
According to a report by SMC Global Securities, the Initial Public Offer (IPO) market has been a big wealth destroyer this year. Utsav Sinha, 30, who had invested in the IPO of L&T Finance Holding in August, has lost nearly 19 per cent against the issue price of Rs 52.
In 2011, there have been 39 public issues, of which two were follow-on public offers (FPOs). Of these, only nine are trading above their issue price today. One reason is the poor market condition. The Bombay Stock Exchange’s Sensitive Index or Sensex has lost 23 per cent since December 31, 2010.
Overall, the total amount raised this year through public issues is Rs 14,112 crore. As markets corrected severely, the current value of these issues is down 29 per cent or at Rs 10,014 crore.
But, Sinha invested thinking his investment in companies like L&T Finance would give at least a small return. His belief was reaffirmed when rating agencies Care and Icra graded the IPO at 5, signifying strong fundamentals. Of the 37 IPOs, 13 were graded average and above or given grade 3 and above. Some others which got above average fundamentals (grade 4) were PTC India Financial Services, Muthoot Finance and TD Power Systems.
Of the 13 above-average IPOs, 10 have lost 10 per cent and more since listing. For instance, Acropetal Techn-ologies, which was graded 3 by Icra, has lost 87 per cent as against the issue price of Rs 90 (listed in March). PTC India Financial, graded 3/4 by Care, Icra and Crisil, has lost almost 65 per cent from the issue price of Rs 28 (listed in March). And Omkar Speciality Chemicals (listed in February), graded 3 by Care, has lost around 41 per cent from its issue price of Rs 98.
Jagannadham Thunugu-ntla, strategist and head of research at SMC Global Securities, says, “Gradings are not sacrosanct. That’s why investors should not base their investment decision only on the grading. These can be one of the criteria but not the only one.”
Gradings, expressed on a five-point scale, are largely a comment on the fundamentals of the issuer. This is an evaluation of the industry, the firm’s strengths as opposed to the inherent business risks, weaknesses, financial position and corporate governance issues. If the proceeds are used to set up new projects, the evaluation could change.
| GOOD GRADES, POOR RESULT Of the 39 public issues this year, most are trading below their issue price due to poor market conditions | |||||
| Name | Rating | Issue Price Rs | Listing Price Rs | Current Market Price Rs | Change %* |
| Flexituff International | Care Grade 3 | 155 | 155 | 266.40 | 71.87 |
| PG Electroplast | Care Grade 3 | 210 | 200 | 209.50 | -0.23 |
| TD Power System | Care Grade 4 | 256 | 251.6 | 234.85 | -8.26 |
| SRS | Icra Grade 3 | 58 | 55 | 33.70 | -41.89 |
| Tree House Education | Crisil Grade 3 | 135 | 132.8 | 149.90 | 11.03 |
| L&T Finance Holding | Care & Icra Grade 5 | 52 | 51 | 42.90 | -17.50 |
| Innoventive Industries | Icra Grade 3 | 117 | 110 | 81.95 | -29.95 |
| Future Ventures | Care Grade 3 | 10 | 9.5 | 9.07 | -9.30 |
| Muthoot Finance | Crisil & Icra Grade 4 | 175 | 180 | 154.00 | -12.00 |
| PTC India Financial | Care, Icra Grade 4/Crisil 3 | 28 | 28 | 9.82 | -64.92 |
| Lovable Lingerie | Care Grade 3 | 205 | 261.5 | 298.55 | 45.63 |
| Acropetal Tech | Icra Grade 3 | 90 | 130 | 11.04 | -87.73 |
| Omkar Speciality Chemicals | Care Grade 3 | 98 | 95 | 58.00 | -40.81 |
| *Calculated against the issue price; Source: National Stock Exchange, SMC Global Security Report | |||||
“IPO grades are not a comment on the issue price, valuation or possible gains through price appreciation. It is not a recommendation to buy, sell or hold shares of a company that has been graded,” says Anjan Ghosh, senior vice president at Icra. This is the main count on which rating agencies fail, feel market experts. The huge wealth erosion may be mainly attributed to tendencies like high issue pricing and lower quality public issue.
Yet, IPO grading is necessary because investors may have limited information about the IPO and cannot assess the company appropriately on the basis of available information. Investment expert Mukesh Dedhia of Ghalla Bhansali Stock Brokers, advises the likes of Sinha to invest with a long-term perspective, as fundamentally strong companies will eventually pay off. “You should check the grading but also look at the business, profitability, promoters and, most important, market sentiment, so that you are doubly sure of your investment,” he says.
The price is a market function and even highly-graded IPOs could do badly on the exchanges if the valuations are very high and the market is on a downward slide.
