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The lure of large IPOs

Suresh Krishnamurthy

Careful assessment is necessary to ensure that what you gain by investing in the IPOs is not lost by staying, or not staying, invested in the secondary market. However, these are only short-term considerations. So, long-term investors — if they are not worried about the need to add value — can forget these complicated issues and remain invested.

INITIAL public offers have always fascinated investors, world-over. In India, there were two bouts of excesses in the IPO market — one in 1994-1996, the other in 1999-2000. In both these instances, investors would have made money in the case of a few IPOs.

Long-term investors would have had the opportunity to add a promising stock to the portfolio.

Speculative investors got many chances to flip the stock — that is, sell the stock obtained in the IPO on listing for a profit.

Both long-term and speculative investors may have lost money in quite a few cases.

Still, if the promise of a quick buck, or of investing in an admired company, exists, IPOs will continue to attract investor interest.

Promising scene: The number of large IPOs in the pipeline should show promise for both long-term and speculative investors.

The line up of companies, such as TCS, BPCL, Nalco, Coca-cola, Maruti and LG, is as imposing as it is impressive.

One estimate has it that IPOs worth Rs 30,000 crore are to hit the market in the course of the next 12 months.

If even half of the promised IPOs materialise, investors will have major opportunities to buy stocks with the potential to deliver above-average returns over the long-term.

That said, it also means that investors need to alter their investment strategy to account for these IPOs.

Have cash on you: Primarily, investors need to be armed with cash to take advantage of the situation.

How many times have you looked at an attractive IPO wistfully because you do not have the cash on hand to participate in the offer?

To ensure that does not happen again, one needs to plan carefully the cash needs over the next 12months. Cash set aside for investing in IPOs may need to be invested in cash and cash equivalents.

Stocks are, indeed, liquid. However, you may be forced to sell when your investment is still to make money for you.

If that does not bother you, you may stay invested in equities and invest in IPOs by rebalancing your portfolio.

Restrained valuation: There is also the implication for secondary market valuations.

Large IPOs need the support of institutional investors. Institutional investors for their part may not be able to bring in fresh money.

They may sell their holdings and invest the cash in these IPOs. That may, theoretically, spell a period of restrained valuations for the stocks.

Expanding universe: On the other hand, a thriving market for IPOs has always been either preceded or accompanied by rising prices in the secondary market in the past (for instance, the bull run in 1994 and 1999).

As the number of stocks with sound prospects increases, so does the ability of an investor to meaningfully diversify his investments.

That prospect may itself be enough to attract large doses of foreign capital into India. Such liquidity can lead to rising prices in the secondary market.

Equities for long term: Overall, there will be several forces at work. Careful assessment is necessary to ensure that what you gain by investing in the IPOs is not lost by staying, or not staying, invested in the secondary market.

However, these are only short-term considerations.

Over the long-term, what matters is whether you remain invested in equity. That will determine the rate of growth of your portfolio.

So, long-term investors — if they are not unduly bothered about the need to add value — can forget these complicated issues and remain invested.

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