Sucheta Dalal :Investors avoid IPO fundamentals; look for quick gains
Sucheta Dalal

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Investors avoid IPO fundamentals; look for quick gains   

April 26, 2010

It is the same story again. Indian investors do not really bother about grades for initial public offerings (IPOs) before investing when the market is hot. And then they invariably regret. As many as 23 companies have gone public since January 2010. Of this, a total of 20 companies have been rated IPO Grades ‘2’ & ‘3’ by ratings agencies, Credit Analysis & Research Ltd (CARE), ICRA Ltd and Credit Rating Information Services of India Ltd (CRISIL). Of this, 11 have been graded ‘3’ and nine have been graded ‘2’. Almost all these issues have been oversubscribed. Just two IPOs have managed to get a grading of ‘4’ indicating ‘above average’ fundamentals.

The IPO grades are assigned on a five-point scale from ‘1’ to ‘5’. An ‘IPO Grade 5’ indicates ‘strong fundamentals’ and ‘IPO Grade 1’ indicates ‘poor fundamentals’.

An ‘IPO Grade 5’ is rarely assigned to a company. The grading is assigned on the basis of a number of factors like the company’s financial performance, its track record, managements’ qualifications and experience, business prospects and corporate governance practices.

“If a fundamentally poor company is available at a cheap price then it can be an attractive investment. IPO grade talks about the fundamentals of the company without commenting on the price. NTPC is fundamentally a very good company but if it is priced at Rs300 then it will not be suitable for investors. If the same company with weak fundamentals is available at Rs100 then it can be a good investment opportunity for investors,” said a top official from CRISIL.

Mandhana Industries Ltd and Jaypee Infratech Limited (JIL), which are set to debut on 27 April 2010 and 29 April 2010 respectively, also appear in the IPO Grade category ‘3’. The hydroelectric power generation company Satluj Jal Vidyut Nigam Ltd, a public sector unit (PSU) has been assigned ‘IPO Grade 4’. None of the IPOs have got a grading of 5/5.

“Most of the IPOs that have come recently have yielded some returns to the investor, irrespective of the grading. Lay investors base their decision on the grey market prices rather than the IPO grading. It’s a pleasant fact or a pleasant coincidence that the market has been on a bullish trend since January,” said Alok Churiwala, MD, Churiwala Securities Ltd.

“Institutional investors generally don’t rely on third-party assessments. They have their own wherewithal within their organisation to assess how good or bad an IPO is,“ added Mr Churiwala.

According to CRISIL, ‘IPO Grade 2’ means that a company has ‘below average’ fundamentals. Tarapur Transformers Ltd, which hits the market today, has been assigned ‘IPO Grade 1’ by CRISIL, which indicates 'poor fundamentals’. Infinite Computer Solutions (which was available at a price band of Rs155-Rs165 per share) which was assigned ‘IPO Grade 2’ was subscribed 43.22 times while Vascon Engineers Limited (Rs165-Rs185 per share) which was assigned ‘IPO Grade 3’ was subscribed 1.21 times.

(With additional inputs from Rudreshwar Malkani)
Ravi Samalad

-- Sucheta Dalal