Share closes with losses of 38%

Shares of Readymade Steel India Limited listed on the BSE on Wednesday the 13th of July and it was a complete disaster. The opening price or listing price was Rs 115. The high of the day was Rs 117.75 and was made right at the open of the day’s trading. The low of the day was Rs 62.30 and was made in the last half an hour of trading. The share closed at Rs 66.45, a loss of Rs 41.55 or a staggering 38.47%.

Readers would be aware that the company had tapped the capital markets with its IPO to raise Rs 3474.53 lacs in a price band of Rs 90-108. The issue was open from the 27th of June to the 29th of June. The issue received very poor response from the QIB’s and a mere 3% of the same was subscribed. The issue received its major response from retail investors who subscribed their portion 4.18 times and the overall issue 1.68 times. This issue was yet another issue which had extremely poor fundamentals and was very aggressively priced. There was no scope of any appreciation on the basis of earnings and prospects which any investor could have hoped for.

The price earnings multiple based on fully diluted equity and annualised earnings based on December 2010 would be 36 times at the lower end of the price band and 40.91 times at the upper end of the price band. Steel companies are available in single digit price earnings multiple and subscribing to an issue which did value addition to steel, had a very low turnover or scale of operation and expect to make profit was surely farfetched.

Why did retail then flock to this issue? The successes of some of these mid and small sized companies where investors have made money in the first few days of listing have prompted investors to subscribe to such issues. What is important to note is that the role of the “friendly intermediaries” in such issues is to get subscription, ensure that all investors get an honourable exit and they are compensated in whatever form by the promoters of companies.

Coming to the listing of Readymade Steel, the share saw a trading volume of 339.80 lac shares which was 10.56 times the IPO size of 32.17 lac shares. The delivery volume was 31.61 lac shares which was a mere 9.30% of the traded volume. The delivery percentage on IPO size was a staggering 98.27%, a figure which has never been achieved before. This effectively means that all the successful applicants have sold their shares on day one except for people holding 55,742 shares. This is a unique event and has never happened before.

The share opened at almost the high of the day and remained steady for the first hour of trade. It then fell sharply to Rs 90 at around 10.30 am. By 11 am the share was trading at Rs 80 and continued to trade at that level for the next three hours till 2 pm. Another crack brought the share down to Rs 70 and then the share around 3 pm simply gave way and made the day’s low of Rs 62.30. Some short covering helped the stock recover marginally and close at Rs 66.45, a net loss of Rs 41.55 or 38.47%. The weighted average of the days trade was Rs 85.67, which indicates the number of people who were able to exit were few in number. The only institutional investor has sold shares around Rs 81, a loss of Rs 27.

All in all the listing of Readymade Steel India Limited was yet another disaster on listing day. I believe the regulators should start looking into the quality and pricing of issues more closely.