IPO Boom

The sustained bull-run with the Sensex nearing the 12,000 mark provides near-perfect weather for companies to raise money. It also provides investors a chance to grab a seat on the bandwagon.

Feeling left out of the bull-run that has seen $4.13 billion (approximately Rs 18,000 crore) plus Rs 4,000 crore pouring into the markets in the last three months from foreign investors and domestic mutual funds? Wondering how to get a piece of the action as the Sensex nudges 12,000? There's a wide window of opportunity even if you haven't bought on the bourses.

Thanks to the sustained bull-phase, companies have dusted out old ideas for raising capital and are queuing up on Dalal Street. With a big issue expected almost every 10 days, the market will see one of the biggest Initial Public Offering (IPO) booms ever-over Rs 1,00,000 crore is expected to be raised between now and March 2007. The IPOs lined up by the big and small of corporate India offer the breeze of fresh air that retail investors, who had either missed the bull-run or could not muster the courage to jump in, were waiting for. Of course, it could cool down Dalal Street too by increasing the supply of investment options.

MEGA BUCK OFFERS The biggest issues heading for Dalal Street

Reliance Communications 15,000 DLF Universal 7,000 Reliance Petroleum 2,565 Hutchison Max 2,000 Idea Cellular 2,000 Power Finance Corp 1,500 Power Grid Corp 1,500 Akruti Nirman 1,000 Parsvnath Developers 1,000 Deccan Aviation 1,000 Figures are amounts expected to be raised through public issues in Rs crore Source: Prime Database

Indeed, investors will be spoilt for choice this year. They will get to pick from issues from companies ranging from airlines to coffee chains. Prime Database, which tracks primary issues, lists 20 banks, 13 construction, 28 information technology, 14 retail and nine media companies-amongst a host of others-that will tap the markets for funds. Reliance Petroleum Limited (RPL), with an issue of Rs 2,565 crore, will be the first in the long list. A Rs 1,000-crore issue from Deccan Aviation, the holding company of low-cost carrier Air Deccan, will be next in line. These will be followed by the Multi Commodity Exchange, which is hoping to mop up Rs 300 crore, and Parsvnath Developers that plans a Rs 1,000 crore issue.

According to Prime Database, 289 companies have queued up with issues totalling over Rs 1,20,000 crore.

Well-known brands such as the TV channel Sony Entertainment Network, Kingfisher Airlines, Maruti Udyog and MTR Foods will vie for investors' attention. Several off-beat numbers will also be there for the picking. The Development Credit Bank for instance, has sought the regulator Securities and Exchange Board of India's permission to go public. Later this year, Asia's oldest bourse, the Bombay Stock Exchange, is expected to float a large public issue. The year 2006 could also give investors the first opportunity to buy into the booming insurance sector, with the government-owned Life Insurance Corporation, Bajaj Allianz General Insurance and HDFC Standard Life Insurance expressing their interest in listing on the stock exchanges.

DOS

Compare the share price with that of the peer group using a valuation tool like the price-earning (PE) ratio . Check if the company belongs to a sunrise sector or one with promising prospects. Browse the prospectus for basic details like what use the funds being raised will be put to. Also check in detail the risks involved. Go for government-owned companies. Their issue price is discounted for retail investors. Smaller unknown companies fuse high risk with high returns. Go for well-known names. Avoid small-sized issues as they can be doubtful.

DON'TS

Don't lose patience if your share does not double on listing day. Equities are long-term investments. Don't hang on to a dud stock. It won't pay, however, long the investment horizon is. Don't forget about your investments after the initial due diligence. Get updates. Don't fall for market rumours or misleading advertisements put out by promoters. Don't over expose yourself to equities. If there's a downturn, you shouldn't face a liquidity crunch.

Variety notwithstanding, the dominant theme is brick and mortar. A large number of construction, infrastructure, real estate developers, telecom and power companies are planning mega public issues with amounts ranging from over Rs 500 crore being raised by GMR Infrastructure to Rs 7,000 crore by DLF Universal. Reliance Communications (formerly Reliance Infocomm) has plans of raising Rs 15,000 crore from investors. At least three other cell phone service providers- Hutchison, Idea and Aircel- are likely to float biggish IPOs. The construction sector is heating up as well with Mantri Developers and Omaxe Constructions, besides Ahluwalia Contracts and Akruti Nirman in the pipeline. Some film and entertainment companies are also waiting in the wings with issues.

Mind you, these industries belong to the extremely high-risk-and, therefore, high-reward-category. Speaking about the huge build-up in the pipeline of public issues from high-risk sectors, a top investment banker requesting anonymity said, "Why do you think these public issues are being floated at such an advanced stage of the rally in the secondary market? Earlier, their high-risk profile would have given cold feet to even seasoned investors." Investors' risk appetite tends to go up as a stock market bull-run gets older and wider, which is why shares that find no takers in the initial stages of a rally get picked up at premiums later on. Promoters of companies with lesser appeal take advantage of euphoric market conditions to exploit investors.

For the first time after February 2004, one of the largest wealth creators-the government-is likely to re-enter the market with stake sales in at least two public sector units. Investment banking sources confirmed that preparations for a 5 per cent government stake sale in the National Mineral Development Corporation (NMDC) and a five per cent disinvestment in the Power Finance Corporation (PFC) are at advanced stages. These two offers are sure to stir even conservative retail investors if they manage to hit the market without facing political roadblocks, given the track record of superior returns from earlier IPOs of government-owned companies.

With so many large issues lined up, 2006 will also bring meatier allotments for public issue investors (see graphic). The issues from DLF, RPL, Deccan Aviation and PFC are expected to mop up well over Rs 1,000 crore each. Huge investor demand for public issues had resulted in smaller allotments per investor last year. Returns from bite-sized investments are lacklustre.

The overhaul of regulations governing companies going public and merchant bankers assisting them, undertaken after the slew of stock market scams in the 1990s when 600 fly-by-night operators such as MS Shoes and CRB Capital had vanished with investors' hard-earned money, has reduced the chances of the recurrence of similar swindles. But some words of caution are still in order. This will ensure that the soothing breeze does not end up carrying the reeking stench of losses.

The often-repeated, yet most overlooked thumb rule is to check the background of the promoters of the company. Returns from past issues from other companies floated by the same promoters can be easy indicators. This rule, however, cannot be applied to issues from first generation entrepreneurs, which have been the biggest stars in the current rally. IndiaBulls for instance, has delivered 1,210.5 per cent returns over its issue price of Rs 19 in 18 months-versus the Sensex's 109 per cent. And while investment gurus claim they can beat the world at picking out undiscovered winners for high returns, lay investors are better off with well-known stories as they have little training or skill in separating the chaff from the grain. Gains from the former beat those from the better known names but the risk associated with them is higher too.

Investors must not over expose themselves to equities. If you have already deployed a large chunk of your savings in shares, refrain from IPOs so that if there is a sudden downturn in the markets, you are not left without any liquid assets. Though equity investments give best results over the long-term, the market right now requires investors to check regularly if all is well with the companies they have invested in and if the promoters are sticking to the promises made at the time of the public issue. There's a party happening right now, but make sure you are not left holding the parcel when the music stops.

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