IPO investors brace for a bumpy ride ahead

Sunday, February 3, 2008

IPO investors brace for a bumpy ride ahead

Till a few days ago, it appeared that people with little or no understanding of equities could more than double their money in two weeks by investing in IPOs, thanks to the exorbitant prices at which these issues got listed on bourses. Some investors even decided to get 'upgrade' by borrowing money and investing through the non-institutional investor's category in public issues, rather than through the retail portion.

But if the listing price of Future Capital Holdings is anything to go by, there is not much good news in the short term for leveraged investors, as several issues prepare listing. Brokers say that people who are planning to invest or have invested in the forthcoming issues should brace themselves for a bumpy ride ahead.

Future Capital Holding shares on Friday closed at Rs 909.80 on NSE, a premium of Rs 144.80 or 19% to the issue price of Rs 765 per share. The stock listed at Rs 1,081 and touched Rs 1,100 briefly. Based on the number of times the issue was subscribed, the funding cost works out to roughly Rs 291 per share.

All those investors who had borrowed money to subscribe, and sold on listing, would have incurred a loss unless they managed to exit above Rs 1,056. Financiers charge roughly 15% for lending money towards IPO transactions. This rate is even higher if the issue is expected to do well, and there is more demand for funds.

Future Capital Holdings issue received applications for shares more than 76 times that was being offered by the company. The IPO is backed by the promoters of Pantaloon Retail, a stock that has delivered eye-popping returns to investors in the last few years. "When the secondary market has corrected more than 20% since the issue opened three weeks back, a dip of similar proportions in the premium in the IPO market is natural," says a fund manager with Birla Sun Life Mutual Fund
His fund house invested in the issue only for listing gains. The other big issue to get listed in the coming days is Reliance Power. Brokers say Reliance Power shares are currently quoting at a premium of Rs 150 in the grey market, about a third of what they were quoting at about a month ago.

Here too, leveraged investors are likely to be in for a disappointment. The non-institutional investor segment — reserved for high net worth individuals and corporates — has been subscribed nearly 160 times. In short, it means that these investors will get only one share for every 160 that they have applied for. However, they will have to bear an interest cost on the entire 160 shares they had bid for.

"Reliance Power IPO may well see a repeat of what happened with the Future Capital IPO," says Rahul Rege of Centrum Broking. "With tide having turned for equities, everybody is expecting panic selling on the first day of listing," he added. Investors seemed to have realised the price of being complacent.

So, what you think? Everyone who opted for 225 shares got 15 or more. Will there be panic selling? Even then, don't panic. Just wait two days and the refund money will fill the market and it will come up for sure. Happy IPO :)

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