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So
2003 was the year of the secondary market. Could 2004 be the year
of the primary market? From the shape and size of the initial public
offers (IPOs) being powdered up for public glare, there's good reason
to say so. Besides, it's in the natural scheme of things to expect
a dam-burst of issues some six months after a major revival in secondary
market activity. A spike in the number of shares exchanging hands
is but a 'leading' indicator. The stockmarket's actual job is to
mobilise capital for business.
Staggering Figures
That a rally can be used as a convenient draw
for an IPO is obvious, and the logic has not escaped the Government
of India, which still owns a large portion of businesses in the
country. This is not a sudden development, however. The privatisation
of state-owned equity has been government policy for a long time
now. And, in the words of Narayan S.A., Managing Director, Kotak
Securities, "It can be said that it is the Maruti IPO that
has revived the primary market. And perhaps the secondary market
too." Just this single signal of the government's resolve to
privatise stock may well have sent the bourses into last year's
frenzy.
How much money is likely to be raised? "There
is a huge list of companies-around 600-in the pipeline that want
to make public issues aggregating over Rs 50,000 crore," says
Prithvi Haldea of Prime Database.
Wait-a-minute... stop. Rewind. Did you hear
that correct? Yes, Rs 50,000 crore in 2004-it's a staggering figure.
More than $10 billion. And more than 22 times the sum collected
in 2003: Rs 2,194 crore.
"But it is very difficult to predict the
exact number that will hit the market during the year," adds
Haldea. Some may go ahead, some may not. A clearer picture will
emerge only after the IPO-hopefuls file their offer documents with
SEBI. Even after that, companies are free to backtrack. So, what
would a more realistic guestimate be for 2004? "If the secondary
market remains stable," responds Haldea, "at least Rs
30,000 crore." That doesn't do much to halt the staggering.
The Hot Five
Many of the star attractions are droolworthy,
as far as the corporate names go (See Expected Public Offerings
In 2004). Reliance Infocomm's absence from this list may disappoint
some investors; it may plan an offer later as conditions shape up.
But even without it, there's plenty of big-scrip choice. Here's
a rundown of the hottest five (potentially speaking):
Oil and National Gas Corp (ONGC): The
biggest one of them all, India's largest company by market cap,
and state-run too. The issue is expected to be in the Rs 9,000-10,000
crore range. The company's recent global and domestic exploratory
moves have already got bulls all excited, though fine-print investors-after
Shell's fiasco-would want to know how shaky the overseas deals are,
particularly in spots such as Sudan.
Tata Consultancy Services (TCS): The
jewel in the Tata crown. Also India's biggest it services player,
ahead of Infosys and Wipro. The enthusiasm this IPO could generate
is unimaginable, given its role in India's emergence as a low-cost
software centre. Its strategic ascent of the software 'value curve',
especially to justify the middle part of its name, will be under
watch.
GAIL (India): Another state-run hot-ticket
company. As gas and pipeline networks rise in importance on India's
energy map, so will GAIL. The value potential would depend on several
complex variables that have moved in a positive direction, lately.
Biocon: A relatively small issue, but
important as a pioneer in biotechnology. The nature of the company's
work is still a mystery to most lay investors, though the market
senses big things to come in enhanced enzyme applications, recombinant
breakthroughs and the like. Expect high specialised interest.
IDEA Cellular: A late entrant to the
bustling mobile telecom services market that relied on sharp-edged
marketing to catapult its brand into customer mindspace, this multiway
Birla-Tata-AT&T joint venture could still pack a surprise or
two as the market moves on from commoditised price-play. Incumbents,
though, are alert and aggressive-and bandwidth constraints imply
high regulation.
Your IPO Strategy
How do you, the retail investor, decide what
to bet on? The price, needless to say, is the big issue, as S. Subramanian
of Enam Financial Consultants emphasises.
But before any of that, remember that all offers
touted as 'IPOs' are not 'initial'; many are simply public offers
of shares that are already listed, even if by way of technicality-and
so have a market price to go by. Institutional buyers are typically
willing to buy such stock at a premium to the market price, but
retail individuals are attracted by a discount offer, "as there
is a blocking of funds for 15-20 days, and the related uncertainty",
explains Haldea. "A higher risk is involved in public issues
compared to the secondary market purchases," he warns, "So
don't get in if the discount is minimal. Retail investors should
apply only if the discount is at least 15-20 per cent to the prevailing
market price."
For any offer, the price must be reasonable,
though it's tricky to estimate this for an initial offer of unlisted
shares. How to make sure you're not paying too much? Try using the
prevailing valuations of industry peers as comparison points to
get a roundabout idea. "Compare only with the closest,"
says Subramanian, "For example, if TCS comes out with an IPO,
the comparison should be with Infosys and Wipro and not with smaller
software companies." The fund-blocking risk applies again;
you may not get allotment.
Hot issues tend to attract stampedes. Do these
put you off? If so, you might want to search for value offers that
aren't as much in the media glare. But then, ensure that you do
your homework on the company's past and projected future-as gleaned
from reliable sources. "Small investors should not try to become
venture capitalists and put money into companies without track records,"
advises Haldea, warning people off a generalised 'IPO mania', with
street crowds jostling for any scrap of printed paper that looks
like a share application form (it's happened before, in the early
1990s). Yes, shares tend to debut at higher prices than the subscription
prices, but that doesn't make it safe to treat IPOs like lotteries.
"As the ability of retail investors to cut losses is less,
they should not try to use the 'greater fool theory'," advises
Subramanian, even if they're in the game for a brief moment of speculation.
Red Herring Redux
Regardless of whether your investment strategy
is to buy-and-keep or buy-and-sell, be wary of rotten issues, and
do take care to exercise the judgement any hardnosed investor would,
taking figures and genuine business indicators into account. The
reputation of the lead manager might serve as a basic indication
of issue quality. Lead managers screen offers carefully, and, as
Narayan says, "the reputed ones won't touch the fly by night
operators". But at the end, it's your money at risk. There's
always a page or two of official fine print in any offer document.
'Risk factors.' It's best if your knowledge sphere actually extends
beyond this.
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