Strategy Switch: IPOs May Offer A Better Bargain On Listing Discounts

New India Assurance, a blue-chip public sector general insurer, priced its share at the recent initial public offering (IPO) at Rs 800 apiece. It had the mortification of seeing its share list in November at a discount. Currently, it trades at a dismal 28 per cent discount to the issue price, at around Rs 580.

Ditto for General Insurance Corporation (GIC), the government’s reinsurance company. It priced its IPO at Rs 912, and today quotes at a 13 per cent discount – at Rs 791. And so is the case with SBI Life, which actually listed at a slight premium to its issue price of Rs 700, but now quotes at Rs 679 or thereabouts. Both GIC and SBI Life were listed in October.

The stock market, despite some short-term weakness, is still holding up, though it may weaken again if the Bharatiya Janata Party loses Gujarat or puts in a weak performance. However, while the market will surely correct itself in the run-up to the budget once it digests the political developments, the real weakness is now more apparent in the new issue market, where many newly-listed stocks are quoting well below their IPO prices. The reason for this is that many companies got too greedy and priced their offerings too high. Thus, when these shares were listed, there were too many sellers.

Some of the biggest losers post-IPO are government-owned insurance companies, which were priced too high and had to be bailed out by the Life Insurance Corporation (LIC) of India. LIC is the safety net for all government disinvestments that don’t sell.

Even private sector insurers were not initially spared, but the market has since woken up to their potential. ICICI Lombard, which priced its IPO at Rs 661, saw its price crashing to as low as Rs 613, but is now quoting at a 15 per cent premium at Rs 766. The best of the lot was HDFC Standard Life, the first IPO from the HDFC group stable in a long while, which is quoting at a super premium of 31 per cent to the issue price of Rs 290, at Rs 381.

Other private IPO issuers were not so lucky. Matrimony.com, which priced its IPO at Rs 985, is down at a 9 per cent discount to issue price. One of the worst discounts has been seen on S Chand, a book publisher, which sold its shares at Rs 670, and now quotes at Rs 492, a 27 per cent discount to the IPO price.

No doubt, many retail investors, lured by the booming stock market, invested in these IPOs in the hope of making a quick gain. They would have lost money. However, the point is that these are essentially good companies, and there is no need to sell shares at a loss just because there are too many IPOs in the pipeline and the market is not able to absorb them in a short period of time. If these companies focus on improving their bottomlines, they will surely fare better in the medium term, and investors could conceivably recoup their losses.

ICICI Prudential Life Insurance, which listed last year at a discount after pricing its IPO high at Rs 334, was quoting below this price for a long period of time. But as the market warmed up to its potential, it is quoting a 12 per cent premium to issue price. At one point, the shares even touched Rs 509.

According to Prime Database, which tracks IPOs, at least six more companies apart from the ones listed above, are trading below their IPO prices.

So, what should investors do now? The simple answer is to avoid high-priced issues during IPOs and buy them after listing. It is difficult to see how an SBI Life, with the backing of India’s largest bank, cannot do well in future. So, buying its shares from the market may be a good option for risk-takers. This should be the case with New India Assurance and GIC Re too. Matrimony.com, which is one of the biggest partner-matching portals, could deliver better in future as the Indian marriage market booms.

As for those who have already bought the IPOs at high prices, a better option may be to sit tight and wait for their prices to recover. This is not a strategy that will work with all IPOs, and in some cases it may be best to sell and cut your losses after consulting your investment adviser. But in the cases of big brand name companies, buying more shares at prices below IPO prices will bring down your average investment price and enable you to make a profit earlier. But, as always, don’t treat this as a recommendation to buy or sell. For that, you need to consult professional advisers.

(A part of this article was first written for Dainik Bhaskar)