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Wednesday, September 07, 2005

How to make a killing in IPOs - CapitalMarket


Investing in a primary offer is often touted to be less risky than buyingshares in the secondary markets. That is because invariably companies comeout with public offers to fund their growth plans. Since the cost ofraising loans is higher for younger companies, they opt for equity.
 
 From an investor's viewpoint, the idea is really to invest in a companywhen it is still at the nascent stage and holds promise for growth. Andprimary offers are also meant to leave some money on the table as a rewardfor investors who keep faith in the stock even before the company hasproved its worth.
 
 But most investors today subscribe to initial public offers (IPO) not tohold the stocks for a life-time, or even for a couple of years or months.Instead, they look to make a quick buck by selling their shares as soon asthe stock hits the bourses. As more and more individual and institutionalinvestors try to exit the counter on the very first day of listing, thestock goes through wild price swings. The volatility at the HT Mediacounter which made its debut on the bourses on Thursday last week is aclear indication of this trend. The stock which was issued at a price of Rs530, opened at Rs 685 and surged to an intra-day high of Rs 731 beforeclosing at Rs 557. A total of 199 lakh shares were traded, significantlymore than the 76.9 lakh shares issued in the public issue.
 
 How does one maximise gains from an IPO if the idea is to make some quickbucks? Here are a few things you should keep track of.
 
 Investors would do well to remember that stocks which are overpriced tobegin with may attract short sellers on listing. Conventional measures suchas the price-earnings multiple - something one looks at while decidingwhether or not to buy a share - should be an indication of whether thestock price is sustainable.
 
 But then, it is not just the valuation. Like any other commodity, stockprices are also influenced by the forces of demand and supply which may inthe short run deviate from the intrinsic worth of the stock. If there is ahuge demand for stocks - you can gauge the demand from the oversubscriptionnumbers - investors who got lesser allocations than desired may go on abuying spree in the secondary markets the moment the stock lists. Earlier,subscription numbers were exaggerated because of unscrupulous bids put inby institutional bidders. However, with the Securities and Exchange Boardof India (Sebi) recently introducing upfront margin payment while placingbids, the subscription figures should be a decent indicator of genuinedemand.
 
 The third point is the level of leveraged positions. This is a significantfactor that influences the stock price movement on Day 1. In other words,leveraged positions indicate proportion of investors who subscribed to theissue with borrowed money.
 
 Since the interest meter keeps running, leveraged investors usually look toexit the stock and take home whatever they can in double quick time. Thereis no way of finding out what portion of an issue is funded throughborrowed capital. All you need to do is to follow news papers and talk toyour stock broker.
 
 This is how it works. Assume that an investor avails of 100 per centborrowing to apply for share of ABC company priced at Rs 500. At aninterest rate of 12 per cent, if the investor borrows for one and a halfmonth, which is the case usually, the interest cost would be Rs 750. Now ifthe issue is oversubscribed 10 times, it would mean that every investorwould get only one-tenth of what he applied for. So instead of 100 shares,the investor is allotted only 10 shares. Dividing the interest cost of Rs750 by the number of shares allotted, the cost that has to be recovered pershare is Rs 75.
 
 The investor would make money only when the share prices goes beyond Rs575. So Rs 575 is an important threshold level beyond which leveragedinvestors would look to sell.
 
 Usually shares open high and head higher as leveraged investors try toartificially push up demand in an attempt to get "decent" exits, and thestock finds its level based on genuine buying interest. If the stockbreaches this threshold level, the fall can be precipitous.

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