Sunday, October 07, 2007

IPO - The Dutch Way?

With the recent Power Grid Corporation of India's IPO jumping close to 100% on listing, the debate is intense on SEBI allowing Dutch auction method for launching IPO. Analysis of few recent IPOs (last 22 IPOs since June 2007) reveals that as much as Rs 4500 crore was left on the table - the difference between closing price on listing day and the IPO price . More than half of this amount can be attributed to Power Grid Corp. On an average this represent a value jump of about 17% which is very much a typical IPO discount to encourage investors overcome the information asymmetry. A closer analysis of top 50% among these IPOs reveal a whopping 75% value jump totaling to Rs 3600 crore. If we drop Power grid from this analysis then it reduces to 45% or little more than Rs 800 crore.

Whose money was it anyway and whom will the Dutch auction benefit?

In case of Power grid it was government's money (direct equity and also the future plans of power grid) which went into the pockets of large institutions.

Analyzing the largest 3 IPOs during the period (DLF, Omaxe and Power Grid) it was only Power Grid which was severely under priced. DLF and Omaxe went up only by 8.6% and 12.9%. So is it about the ability of underwriters to price the IPO or about the ability of management to understand intrinsic value of their own company?

Dutch auction is theoretically a ideal solution which Google tried with its IPO but it was largely unsuccessful in meeting its objectives. The primary reason was execution. Dutch auction put lot of emphasis on investors to accurately price the offer. With lack of credible information and valuation abilities, are investors in a position to invest wisely?

Saturday, October 06, 2007

Sensex - 20/20 champion by year end!

Will SENSEX go Up or Down ??

If the current euphoria in India Inc is to continue, then I predict the Sensex to cross the 20K mark by the year end.

At the current bull run the BSE bellwether index is trading just a notch above its long term historical P/E average (current P/E of about 24 vis a vis average since 1991 being 21.65). Current P/E is largely a result of the bull run seen in the last 12 sessions. Market is still at a lot lower P/E than what it had seen during the downturn of Jan 2000. The market needs to be more than 21K today to reach that levels of P/E.

The Q2 earnings will start coming in soon and the expectation is that India Inc will grow again by a handsome figure in the north of 10%. So the current P/E ratio (and even the historic one) justifies 20K by the end of Q3.

Another interesting fact here is the Price to Book Value ratio. It is currently at its highest value in more than last 10 years. Is this a sign of worry? Traditionally price to book value was in good correlation with P/E but currently it looks somewhat overheated. But here my belief is that it is largly due to the run in real estate prices. For many companies the book value of these assets depicts the historic value but today the market values them much more. So unless real estate prices crash, which is unlikely for commercial property, the current market levels should be sustainable and very much bullish.