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The Initial Public Offering or IPO market as it is known, received a new lease of life in FY99. With high profile issues like Hughes Software and TV-18 opening at more than 3 and 10 times their issue price respectively, investors are flocking to the IPO market like never before. Companies, which had earlier shied away from the capital market, are now returning with a vengeance to satiate the appetite of investors. Some of the over-subscription details of recent IPOs are mind-boggling: TV-18 by 51 times, Glenmark by 55 times and HCL technology by 27 times. Other software issues like Hughes and Polaris Software have been oversubscribed by 15-20 times. The reason for this enthusiasm can be attributed to the software boom that markets have witnessed over a past year or so.
But should one just jump for an IPO as soon as it is announced? Here an attempt has been made to outline some issues that investors should look at before they making investment decision.
Before investing in an IPO, investors are suggested to run a check on the following factors:
The Lead Managers act as a catalyst as they attempt to bring in some credibility to the offer and their accountability is also very high. Remember that the lead managers’ credibility could act only as an indicator to the proposed issue, but does not assure success. There have been poor issues from good merchant bankers in the past.
For the purpose of security, one can look for category one lead managers for judging the quality of the issue that includes DSP Merrill Lynch, HSBC Securities and Kotak Mahindra among others.
Issues where post-issue promoters’ holding is more than 80% may indicate a lack of liquidity in the stock since there are fewer shareholders trading fewer shares.
Be careful of companies that have issued shares on a preferential basis to promoters in high proportion, so as to increase their stake in the company. Also find out if this is an offer for sale or a genuine Initial Public Offering. In case of offer for sale, the issuing company may not benefit totally.
Look for companies in which venture capital firms or financial institutions have participation or substantial interest. Also look for the shareholding pattern. This would indicate the risk profile of the company and the expectation of the institution from the company. In case of institution, look for nationalized banks and all India level financial institution such as ICICI, IFCI IDBI etc.
Be careful of companies whose cost of project and means of finance have not been appraised by banks or financial institutions.
If the major portion of fund mobilized is being invested in land, buildings (the so-called green field issues) be careful.
If the company is utilizing a portion of issue proceeds towards retiring high-cost debts, it would benefit the company in terms of lower interest outflow and therefore higher profitability. Also check the proportion of money that is being invested in new projects that it is venturing into. This would give some judgement on the estimated profitability of the company.
The growth of the company in proportion to the growth of the market in which it operates has to be seen. Also look out for its market share or the projected market share vis-à-vis domestic competition. For example, figures of global software market or Indian software market do not indicate the exact future growth potential of the company since it is inclusive of all products and services. Export projection of the sector need not necessarily reflect the export potential of the company. See what the company is exporting and export income as a percentage of sales.
Each sector has its own internal and external factors that influence the operation of the company. For example, software sector is vulnerable to high employee turnover.
Do the promoters have previous experience in transforming organizations from the grass root level in the same industry to a successful business? What is the experience they have in the sector the company is operating in or any other sector. Promoter experience is very crucial.
Also check out the profitability of any subsidiary or affiliate company in which promoters have a stake or substantial interest. This would enable us to ascertain the management’s efficiency in terms of managing organizations.
Check for litigations against the promoters, nature of litigation and the promoter’s extent of liability, if any.
To justify pricing,
Companies with foreign exchange earnings are entitled to certain exemptions. If the company’s factory is in backward regions, they are entitled for subsidies as well as some tax exemptions. Lower incidence of tax benefits companies as their cash flows are increased to that extent.
The ultimate ‘Watch word’
Caveat Emptor! Buyer Beware. This should be the watchword for investors. Any company may opt for an IPO. But, ultimately it is your hard-earned money that is getting diverted into unproductive investments, which may not give you the required return.
Sorry! There are no related views on news for this company/sector.
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