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Most oversubscribed issues crumble in India’s bear market

Most oversubscribed issues crumble in India’s bear market
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First Published: Tue, Aug 19 2008. 11 59 PM IST

Updated: Tue, Aug 19 2008. 11 59 PM IST
Mumbai: Oversubscribed initial public offers, or IPOs, don’t appear to suggest how a company’s stock will do subsequently in India’s bear market.
A Mint analysis of 37 new stocks, all of which listed in 2008, shows that some of the most oversubscribed stocks have yielded the worst returns, with many of them underperforming the Bombay Stock Exchange’s benchmark index, Sensex. Of the nine stocks that were subscribed by at least 10 times, seven had negative returns ranging from 15.71% to 55.54%.
“When these issues hit the market, the sentiment was quite bullish,” said Nitin Khandkar, vice-president (research) of Keynote Capitals Ltd, a Mumbai-based brokerage. “Once they are listed, they are...like any other shares and the market has underperformed.”
To be sure, the broader market has fallen during this period as economic growth slowed in India and the rest of the world, and investors pulled money out of the market fearing?uncertainty over the rising interest rates and inflation, which is now ruling at 12.44%, a 16-year high.
While the Sensex has fallen 28.31% since January, BSE’s small-cap and mid-cap indices have fallen by 47.36% and 41.1%, respectively. Of the 37 new issues this year, only seven have reported positive returns. Some of them are mid-cap and small-cap stocks.
“Many of the issues were aggressively priced and came at the peak (of the bull run),” said Dhirendra Kumar, chief executive of Value Research, a Delhi-based independent mutual funds research firm. Some issues, such as “Future Capital Holdings Ltd, was hyped and came at the end of the bull run.”
Future Capital was subscribed 133 times, the most among IPOs this year, when it came to the market in February. A month later, it had a price-earnings (P-E) multiples of around 450 compared with the Sensex P-E multiples of 20.11.
P-E multiple is a valuation ratio of a firm’s current share price compared with its per-share earnings. In general, a high P-E multiple suggests that investors are expecting higher earnings growth in the future. However, it can also indicate that a stock is over valued.
Based on Tuesday’s price, Future Capital has lost 55.54% Another example is BGR Energy Systems Ltd. Subscribed 119 times, this stock has lost 36.26% since its listing on 3 January.
In comparison, nearly half the 105 stocks that were listed in 2007 were subscribed by at least 10 times and only three among them had negative returns at the end of that year But, then, the Sensex gained more than 45% last year.
“There was a divergence between price and value (for these highly oversubscribed shares) when they were issued,” said Manish Sonthalia, vice-president of equitystrategy at Motilal Oswal Securities Ltd. “Now there is a convergence.”
What’s more, all these highly oversubscribed issues had an IPO grading of three, which is average rating or above, except for three that were not rated.
“It’s a mismatch of expectations,” said Kailash H. Biyani, chief executive officer of Asian Markets Securities Pvt. Ltd. “There was an euphoria of earnings in the last few issues and the oversubscription was in anticipation of making good profits.” Reliance Power Ltd, the biggest ever share offer in India that was subscribed 73 times, has lost 44.09%, adjusted for a 3-for-5 bonus issue three months afters its listing.
The general bearish sentiment has also meant that the pipeline of IPOs is drying up. In the first eight months of last year, 77 companies entered the market to raise money through new issues in comparison with 37 this year. So far, 19 firms have filed offer documents with market regulator Sebi for IPOs since April 2008.
ashwin.r@livemint.com
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First Published: Tue, Aug 19 2008. 11 59 PM IST