Poor Performance of small IPOs

Investors, who subscribed to small IPOs over the past three years have found, much to their disappointment as 4 out of 5 IPO’s eat away their wealth.

In primary market, Of the total initial public offerings (IPOs), that were floated over the past three years to raise less than Rs 100 crore each, only a handful were able to provide meaningful returns to investors. It is true that the primary market offers an efficient alternative over the debt market to small-sized companies that need funds for business expansion, but, not all such ventures are worth their salt.

A number of smaller companies hit the IPO route in the three years beginning 2008, many of them with a stated objective to raise funds either to expand capacities or to set foot in new geographies directly or through acquisitions.

A lot of these issues were aggressively marketed to retail investors, appealing them to be a part of the huge growth potential that would be unlocked. In hindsight, however, not all of them delivered what they promised to.

The following are the IPO’s, which were launched raising less than Rs 100 crore.

a) The analysis shows that 80%, or four out of every five, of IPOs in the sample failed to generate returns. The shares of Porwal Auto Components and Nu Tek have lost nearly 90% of their offer price since their listing in 2008.

b) The stock of cotton fabric and garment maker Bang Overseas, has fallen by 84% from its offer price of Rs 207 since its listing in February 2008.

c) The 78% drop in Euro Multivision's stock price, which was listed in October 2009.

According to the analysis, over half of the sample firms failed to report profit growth at the operating and net level in the latest quarter. There could be several factors that tend to hamper the growth of these companies. These broadly include inability to compete with bigger, established players due to the lack of either economies of scale or strong brands. Sector-related factors may also impact the growth; for instance, a demand slump in the textiles sector in the past three years has severely affected the performance of majority of textile IPOs.

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Technological breakthrough could be another reason that may reduce the demand for the company's products based on older technologies. Take, for example, Euro Multivision, which makes optical media storage devices, such as recordable compact discs (CDRs). With proliferation of flash memory based mass storage drives, Euro is facing a demand crunch amid a global supply glut for CDRs. The company reported a net loss in each of the past three quarters. Given these factors, investors need to exercise abundant caution while making investments in small IPOs.

One issue is that it is difficult to ascertain the real value of a firm's stock at the IPO stage; that may be possible once the company is listed on the bourses. This is also true about the long-term financial performance of the IPO candidates. Most companies at the IPO stage tend to report impressive growth in sales and profits, which could be a reason enough for gullible investors to participate in their offerings.

So it is important to go through the red herring prospectus (the document the company launches while listing the IPO) offers a load of valuable information that can help them ascertain management quality and the seriousness of business strategies of companies .

There were a few small IPOs, which did well after listing, despite volatile market conditions. Some of them include V Guard Industries, Kiri Dyes and Chemicals and Prakash Steelage.