LIFE RETURNS TO IPO MARKET

[Dr. Sanjiv Agarwal]

After a lull of over few months, capital market will once again have a public offering of shares from L & T Finance Holdings Ltd, a subsidiary company of Larsen & Toubro when it enters the market this week with a issue size of Rs 1245 corers. The future looks to be more interesting as many public offers from companies such as SAIL, ONGC, IOC, Hindustan Copper etc may hit the market in near future.

It has been seen that Indian IPO market does not go by fundamentals generally and the returns from IPO market are highly volatile reflecting an irrational price behavior . There have been about 24 IPOs in 2011 of which more than half  have fared badly  in post listing scenario with listing prices ruling below 20-60 percent.  Investors of IPO market should do their home work before actual investment is made and should not be lured by big gains or having a short term killing. IPOs must be invested in keeping some reasonable investment holding period (say 1 to 3 years or even more).

With India’s growth story being a continuous process, more so in financial services  and infrastructure sectors, an issue of securities from this sector is likely to yield positive results L & T Finance Holding offers a vide range of financial products in infrastructure and  finance sectors, besides mutual fund products through its subsidiary companies. It focuses on infrastructure and rural development with high quality credit portfolios.

The company’s business sectors are its strength and growth drivers. The company comes from a strong and professionally managed L&T group which has flexibility in its businesses as well as financial structuring. It is expected that company’s shares will be offered with a price band of Rs 51-59 per share and that there will be a discount of Rs 2 per share to its existing employees.

While L &T Finance Holding could be considered an investment opportunity presently available for IPO investors, it should be kept in mind that such investments are rewarding only when made keeping long term horizon in mind. In case of L & T, this is more relevant as the sector in which it operates calls for long term returns.

Investors should look at firm’s growth prospects and other income  (non business income) to check regular business / operational income as also the quality of management and strong corporate governance practices. Another important point to decide on investment is safe credit rating which investors should look at.  IPO grading separates a good IPO from a not so good one which compares the fundamentals. However, IPO grading need not be the only criteria  to take an investment call.  It would be desirable to visit company and SEBI’s website to look at offer document and attached risks to which investment could be exposed to.

Subject to reasonable pricing, investors may prefer to invest in divestment of government holding in public sector undertakings including banks. This may result in enhanced quality of investment as such companies are backed by the government. The reasons for raising money, objectives of issue, future growth prospects, business volumes present and projected, estimations on future profitability etc should also be looked at.  

Sometimes, it makes sense not to invest in IPO but wait and watch till the scrip is listed on the bourses. It may be a good idea to buy from the stock market, once the scrip is listed and price settled. Investors may also wait for first two days and watch the subscription figures before actually subscribing to it. Given the prevailing market scenario, investors are guided to be selective in approach- both in terms of industry sector as well as company.