The week running up to February 11, 2008, marks a low point in IPO history. Since we are not good at remembering history, we often get nasty surprises whenit repeats itself. I wonder whether, three years on, if the Sensex reaches 30,000, anyone will remember this disastrous IPO week. First Wockhardt Hospital withdrew its IPO, as there were no takers despite steep price cuts. Next, Emaar MGF cut its price twice,
extended the deadline, and then withdrew, citing poor market conditions. And on February 11, the Reliance Power IPO fizzled out within seconds of listing. How clearly I remember the press conference at which Anil Ambani read out a list of firsts: subscribed in 58 seconds, 42 lakh shareholders (the largest in any company), and so on. The oversubscription to Reliance Power reflects the marketing muscle and brand equity of the group. The entire nation, it seems, opened demat accounts. High networth individuals leveraged themselves and pumped in several thousand crores of rupees. Even QIBs (qualified institutional buyers), probably the smartest of the lot, rushed in, like ants milling around a pot of sugar.
People would not behave like this if they felt power stocks were overvalued, and behaving like technology stocks of the dotcom era. Just as theories about eyeballs and unique visits did the rounds then, the market was now rife with theories about power shortage, capacity build-up, and land banks.
Now, companies generate profits not because of “other income”, but because of their competitiveness, innovation and execution. But it seemed as if landbanks and all those fine-sounding theories would translate into profits year after year. Promoters had found an easy way to raise money. And who would complain? Making money was no longer the preserve of the market-savvy — housewives, students, paanwalas, everyone became a fund
manager overnight.
Going by recent issues, it seems as if IPO stands for “It’s Probably Overpriced”. Too many undeserving IPOs scraped through, but they’ll come down to earth some time. To win in the stock market, two things are key: price and valuation. It’s really surprising that QIBs, despite their access to intelligence and valuation tools, and their research, oversubscribed such issues hugely. What were they thinking?
In markets like as these, it helps to go back to the basics. We couldn’t say it better than the legendary Benjamin Graham in The Intelligent Investor: “No matter how many people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business. At the peak price on day one, investors were valuing VA Linux at a total of $12.7 billion. What was the company’s worth? Less than five years old, VA Linux had only sold $44 million of its software and services—but had lost $25 million in the process. This business was losing 70 cents on every dollar it took in. If VA Linux were a private company owned by the guy who lives next door, and he leaned over your picket fence and asked you how much you would pay to take his struggling business off his hands, would you answer $12.7 billion. But when we are in public instead of in private, when valuation suddenly becomes a
popularity contest, the price of a stock seems more important than the value of the business it represents. By December 9, 2002, three years to the day the stock was at $239.50, VA Linux closed at $1.19 per share.” Well, VA Linux had been around five years—more than we can say about Reliance Power. Several days ago, I said to a group of people that I expected Reliance Power to list below Rs 450, and they looked at me like I was cuckoo.
To the much-touted recordbreaking features of the Reliance Power IPO, we can add a few more: it was the fastest fizzle-out. And it’s a frontrunner for IPO flop of the year. Only time can tell where this stock will go, but it has certainly taught investors some important lessons about investing in IPOs.
Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor
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