AN ANALYSIS OF THE BEST AND THE WORST OF ALL IPO’S DURING THE YEAR

The year 2011 saw a total of 39 primary issues and two FPO issues. The current evaluation includes these 41 issues and six issues which consist of 5 primary issues and I FPO which listed in the last fortnight of December 2010. The year 2011 was a watershed year in the primary market. The quality of issues which hit the market deteriorated substantially and the end of the third quarter in September saw issues which were very poor in fundamentals and grossly overpriced, hitting the market. So bad was the situation that of the 9 issues that opened in the last week of September, as many as 8 issues had fundamental grades of 2 or less indicating below average and poor fundamentals. Two issues opened and failed to get subscribed during the year under review. We also had one unique IPO Vaswani Industries which after a prolonged delay was allowed to list but only after it did a buyback of 15% of the shares allotted and then issued bonus shares to the public shareholders. All in all a year in which things happened but investors lost money.

SEBI stepped in and investigated seven such issues and issued orders against these companies and in some cases also against the merchant bankers. The orders were detailed and investigated at length the wrong doings of the companies and its promoters. One more such order is expected in the next fortnight and it is believed that another 5 to seven companies would be covered. One other thing that has been debated is having price controls on IPO’s on listing day which has been considered by SEBI and now strict price controls have been introduced where issue size of Rs 250 crs and under would have a price band of 5% while issues having a size above 250 crs would have a price band of 20%. A further safeguard against the dumping of shares which has been the exit route for pre-sold issues would be the sub 250 crs issues being traded in the “Trade to Trade” segment for the first 10 trading sessions eliminating almost all chances of manipulation. In all cases there would be a price discovery session for the first hour as happens every morning in the first 15 minutes for shares which are part of the SENSEX and NIFTY. It would be this discovery price or the IPO price which would be the basis for circuit filters.

A summary of these 47 issues shows that 10 of them closed the year with gains while 37 of them closed in the negative. The issues from the PSU stable also have not done well this year. There were 3 primary issues and 2 FPO from PSU’s in the period under review. The PSU issues have not done well either and have lost between 1/3rd and 2/3rd in value with the best of the lot being PFC which had come out with an FPO and the worst being SCI which also had an FPO. The details of all the issues are given below: –

The summary shows the sorry state of affairs of issues hitting the markets and the reason why investors are shying away from the markets. 10 issues or 21.2% of issues made money while 37 or 78.7% lost money. The worrying part is the amount of loss suffered by investors. 19 issues out of 37 or more than half the issues which were negative lost more than 50%. Yet another way of looking at the same is that 19 out of 47 or 40.4% of the issues lost more than 50%. With such losses when an investor says why one should apply there is no answer that one can offer to the investor. The entire community is responsible for the same and until and unless concerted effort is done in this direction this avenue of raising money would be closed for the community and entrepreneurs and promoters would look at different avenues to raise money.

The joke of the year is the fact that the top performer of the year is Onelife Capital Advisors Limited against whom SEBI has passed strictures in its order against 7 companies which had raised money in 2011. This company is a merchant banker and is currently a loss making entity as per results declared till March 2011. The order was also against the merchant banker of the company. The second Hero is AanjaneyaLifecare Limited which gained 111%. The stock has been extremely volatile and the performance of the company not quite known. In any case when the quality of issues have deteriorated this kind of doubt is bound to exist.

One very interesting thing that has happened during the last year is that wherever issues have been high profiled or highly talked about, the expectation of investors got raised and those companies just failed to rise to the occasion and did not deliver. Punjab and Sind Bank was very heavily subscribed and had a total oversubscription of 50.75 times. Net effect of the same was that the share made its peak on day one itself and is well below the issue price having lost 50% in value since listing on the 30th of December 2010. Let us now look at some Heroes and Zeroes of 2011.

A2Z Maintenance Services limited

This was one of the high profile issues of 2011 which listed on the 23rd of December 2010. Billionaire investor was the driving force for the company and its high profile marketing effort to raise Rs 675 crs through a fresh issue and an offer for sale of 45.56 lac shares. The issue was just about subscribed and after withdrawals the final allotment at the lower end of the price band of Rs 400 was 91.37% of the issue size. The company therefore reduced the offer for sale from the original 45.56 lac shares to 26.94 lac shares. The share lost ground on day one and was down 17.8%. This was despite the fact that the promoter of the company Mr Amit Mittal and the private equity investor RakeshJhunjhunwala bought 18.75 lac shares and 16.875 lac shares from the market respectively. The spirit of the buying of shares and the fact that with these shares being bought the public shareholding has slipped below the 25% level is self-defeating the very purpose of the offer for sale.Anyway all these events were not enough to support the share price and the same has been falling to hit a low of Rs 84.15. The share closed at Rs 87.85, a loss of Rs 312.15 or 78.04% for the year.

Acropetal Technologies Limited

The company launched its IPO in a price band of Rs 88-90 to raise Rs 170crs. The IPO was subscribed 1.28 times. The issue price was Rs 90 and the high of the share in the week of listing was Rs 150 and the close Rs 102.50. The delivery on day one of listing was 54.77% of the IPO size. After the first seven days of trading when the share made a new high of Rs 156, the downward journey began on expected lines. In the next two days it was below the IPO price of Rs 90 and the low of Rs 10.75 was touched during the course of the year. The share closed at Rs 10.92 for the year a loss of Rs 79.08 or 87.87%. This was one more issue where the investor was wiped out.

Brooks Laboratories Limited

This company had tapped the capital markets in August 2011 to raise Rs 63 crs in a price band of Rs 90-100. The issue was subscribed 1.6 times but did not receive a single subscription from QIB’s. The issue opened well on listing day and the high of the share against an issue price of Rs 100 was Rs 131.10. The share price fell sharply from there and closed at Rs 60.20. The first week of trading saw the share close at Rs 42.10. The low of the share for the year was Rs 12.50 and the close was Rs 12.80, a loss of Rs 87.20 or 87.20%. Incidentally SEBI has taken action against this company and its merchant bankers for misusing funds earmarked for the IPO. The company has paid the contractor for installing the machinery in its new plant to be set up in Gujarat even though the land is yet to be handed over to the company. This is yet another case of promoter and merchant banker ensuring that the investor is robbed of his hard earned money.

Lovable Lingerie Limited

This company listed on the 24th of March 2011. The company had tapped the capital markets in a price band of Rs 195-205 and raised Rs 93.27 crs at the top end of the price band. The issue was subscribed over 35.21 times. The issue was very well subscribed and was compared as a cheaper valuation to Page Industries, the Indian franchisee of Jockey Industries. This fact helped Lovable touch a high of Rs 636.50, a gain of Rs 431.50 or 210.48%. The share was trading at slightly more than 3 times its issue price and was in no way cheaper than the valuations of Page Industries, a company who had a turnover of over 4 times that of Lovable. The share has corrected substantially from those levels and became half in value in about three months’ time and is currently trading at Rs 310.90, which is a decent gain of Rs 105.90 or 51.66%. Compared to the stocks which have lost ground atleast to the credit of this stock is the fact that there are fundamentals to support the stock.

MB Switchgear Limited

This was a unique IPO where a company involved in manufacturing and trading of transformers tapped the capital markets with an IPO where the object was to set up a project for solar power plant, an area where they had no expertise. The company raised Rs 93 crs by offering 50 lac shares at a price of Rs 180-186. The issue was subscribed 1.57 times. The market cap of the company on a fully diluted basis was Rs 372 crs and the PE of the company a staggering 480 times. The project of 6 MW of solar power would cost Rs 100 crs for which the company had term loans of Rs 22.5 crs and was raising Rs 93 crs from the public. The market cap pre-IPO for the promoter holding of 75% was to be a staggering Rs 279 crs for a company which had a turnover of Rs 34 crs and a net profit of a mere Rs 77.48 lacs. This market cap increased to a peak level of Rs 780 crs where the valuation per MW of solar power would be Rs 130 crs when it costs a mere Rs 16 crs per MW to set up and the Government of India encourages the setting up of such plants. Anyway after the customary high of the listing week at Rs 390, the share closed at Rs 319.80. Thereafter the share began its downward journey having trapped investors and making them lose their shirt. The share made a low of Rs 60.40 and closed the year at Rs 62.30, a loss of Rs 123.70 or 66.51%. This scrip had recorded a turnover which was higher than the market leader Reliance on listing day. Not only that the stock price rose from a low of Rs 118.65 to Rs 356 in a mere 150 minutes. The price movement, the fundamentals and the subsequent fall all indicate that this was a pre-sold issue and was part of the rampant manipulation which happens in primary issues. It is widely expected that SEBI is investigating this issue and some action would be taken against this company when the next order on IPO’s does come.

Moil Limited

This was a PSU offering and the company had sold shares at a price of Rs 375. Retail investors were given the customary discount of 5%. The issue received excellent response and was oversubscribed 56.43 times. It is important to note that the issue did so well that the HNI portion was subscribed a staggering 143.30 times making the HNI cost of leveraged application between Rs 175-190 which meant that he had to sell at a price of Rs 550-565 to recover his costs and be neutral leave aside making money. The high of the share was Rs 591 but the share barely traded at that price. The share closed on day one at Rs 537 a gain of 40%, but by the end of the week was at Rs 460. The low of the year was Rs 217.35 and the close at Rs 227.75, a net loss of Rs 147.25 or 39.27%. This was a great issue, it got hyped because of excellent response from all categories particularly HNI’s and even in the retail category where after a very long time people who had subscribed for the maximum permissible limit were allotted the minimum shares and that also by lottery.

Punjab & Sind Bank Limited

This was yet another PSU offering and this was a hyped issue as the last PSU bank to go public. After this bank issue there would be no other PSU bank which had not yet become public. This issue received huge subscription response and was oversubscribed 50.75 times. The HNI category was oversubscribed 85 times and the cost for the leveraged application was Rs 34 per share. This meant that the HNI was losing money first thing in the morning and as the day progressed, the fact that the share would not be able to recover from the selling pressure caused by the leveraged HNI saw the share slipping. By the end of the day the share closed with gains of under 6% at just about Rs 127. The retail subscriber to the issue received allotment of the minimum lot of 50 shares but on lottery basis and thus the returns to the investor were quite poor.

The share price fell through the year and made a low of Rs 56.05 and closed at Rs 60.20 for the year, a loss of Rs 59.80 or 49.83%. This was yet another example of a good PSU offering getting hyped and as a result of the hype and subsequent oversubscription failing to deliver the results. Investors have lost half their money in this issue as well.

Taksheel Solutions Limited

This was an issue from Hyderabad and was for 55 lac shares in a price band of Rs 130-150. The issue received poor response from QIB’s but was very well supported by HNI’s and retail investors who subscribed the issue 4.7 times and 6.18 times respectively and helping the issue be subscribed just about 3 times. The share made a high of Rs 185 for the day but closed at Rs 55.85, a loss of 63%. This share closed at the end of the first week of listing at Rs 29.05. The low of the year was Rs 12.30 and the close was Rs 13.40. The share has lost Rs 136.60 or 91.07% and wins the “ZERO OF THE YEAR 2011 award”.This company was lead managed by a PSU bank merchant banking division and the company and the merchant banker have both been hauled up SEBI in their order in December 2011.

Summary observations

The key takeaways from primary issues are as follows: –

One hopes that with a new set of listing day conditions and virtually no possibility of earlier pre-sold issues happening in the new regime, primary markets would improve in the immediate future. The market needs a few bold companies to make interesting and profitable offerings to attract investors back to the market and change the sentiment. Let us all put our best foot forward to help revive the markets.

Wishing all a happy 63rd Republic day.