Vineeth IPO CUSAT

Investment is a current sacrifice
{Commitment of Funds} in the anticipation

of a future benefit {Rate of Return or
Growth in Value}
An investment is one operation which, upon

thorough analysis, promises safety of
principal and an adequate return.
KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 2

 Physical Assets
Real Estate; Bullion; Commodities; Art etc
 Financial Assets
Bank and Post Office Deposits; Insurance;
Capital Market Instruments; Derivatives,
Mutual Funds, etc
Due to better literacy rates and accessibility

there’s a well developed equity market in
India. Our topic resides there.
 PRIMARY MARKET in equity is where the
companies raise funds through Public, Rights
or Preferential issues.
 SECONDARY MARKET is the clearing house
{Stock Exchange} where the scrips of listed
companies are traded.
 INITIAL PUBLIC OFFER {IPO} is a preliminary
before getting listed in a stock exchange

 Among the Different avenues, Equity investments are
forming the favorite meal to the risk appetite of many
investors.
 But, IPOs, by their very nature, are inherently riskier
than the secondary market as the companies making
IPOs have no previous public record of performance.
 IPO investing is good primarily for boom times, on
other occasions it need not meet the expectations.
 Fundamental Strengths matter when it comes to long
term performance

To put in technically simple,
it’s BULLISH when the market moves up; and
it’s BEARISH when the market falls…
{Ceteris Paribus…i.e. Other things remaining
the same……..!!!!!!!!!}
 Listing means admission of
securities of an issuer to trading
privileges (dealings) on a stock
exchange
 The prime objective of admission
to dealings on the exchange is to
provide liquidity and marketability
to securities, as also to provide a
mechanism for effective control
and supervision of trading.
 Book Building is basically a process used in
IPOs for efficient price discovery.
 It is a mechanism when the IPO is open, bids
are collected from investors at various prices
within a price band (i.e. A Floor Price and A
Ceiling Price… e.g. Rs 200 – Rs 400).
 The offer price is determined after the bid
closing date.

 The 313 IPOs made during 2005 - 2009 has
been taken as the universe for the study. They
are assessed on the basis of 1 year price
performance at Bombay Stock Exchange
[BSE].
 One year holding period would be exhibiting

the average behaviour of the technical's and
fundamentals of the scrip.
P 1 – P0
Return on the Security in % = X 100
P0
Where;
P1 = Price at the end of holding period
P0 = Price at the beginning (here, IPO price)

 Equities that registered a positive rate of return
over one year was only 21 out of 62.
 Equities with more than 50% return include

over one year was only 33 OUT OF 87.


 THE GLOBAL FINANCIAL TSUNAMI
SHOWED ITS COLOUR ON INDIAN
MARKETS TOO…… !!!
 Equity with a positive rate return was
ALKALI METALS 38.59%

 STRONG FUNDAs LEAD INDIA’s RECOVERY
 The fear is evident from the number of IPOs itself

 Out of the 62 IPOs made in 2005, only 21
(34%) have registered a positive rate of return
for a one year holding period.
 Out of the 43 IPOs made in 2008, only 1 (2%)
have registered a positive rate of return for a
one year holding period.
 i.e. Out of the 313 IPOs made during the
Five Year period (2005-2009), only 94
(30%) have registered a positive rate of
return for a one year holding period.
 H0: There is no relation with the market
returns and price performance of IPOs.
 i.e. The beta coefficient (β) is less than 1
 For testing the Null Hypothesis, a 12 month beta
coefficient has been computed for the 4 top
performing securities in relation to the BSE
index.
β > 1 denotes Aggressive stocks
0 < β <1 denotes moderate relation to the market
β < 0 denotes Defensive stocks

12 MONTH BETA
EQUITY
COEFFICIENT ( β )
GLOBUS SPIRITS -1.8956
JINDAL COTEX -1.6028
MAHINDRA HOLIDAYS AND RESORTS -0.7029
EDSERVE SOFTSYSTEMS -20.711
 As the beta coefficients are found to be less than 1,

the Null Hypothesis is accepted and conclusion
derived that the IPO price performance has no
relation with the market returns.

BASE YOUR INVESTMENTS ON THE FUNDAs
“Only buy something that you’d be perfectly happy to

hold if the market shut down for 10 years.”
– Warren Buffett

 The Securities and Exchange
Board of India (SEBI) was the 1st
regulator in the world to
introduce and implement IPO
GRADING as a mandatory
requirement.
 Yet .. There is overvaluation…
How??

 IPO grade 1: Poor fundamentals
 IPO grade 2: Below-average fundamentals
 IPO grade 3: Average fundamentals
 IPO grade 4: Above-average fundamentals
 IPO grade 5: Strong fundamentals

 A. Business Prospects and Competitive
Position
 (i) Industry Prospects
 (ii) Company Prospects
 B. Financial Position
 C. Management Quality
 D. Corporate Governance Practices
 E. Compliance and Litigation History
 F. New Projects—Risks and Prospects
 Despite of all the factors being assessed, IPO
grading is done without taking into account
the price at which the security is offered in
the IPO.
 Since IPO grading does not consider the issue
price, the investor needs to make an
independent judgment regarding the price
at which to bid for/subscribe to the shares
offered through the IPO.
“It’s far better to buy
a wonderful company at a fair price

Than
a fair company at a wonderful price.”
- Warren Buffett

 As the IPO GRADES are just a formality when the
promoter of a company with an Average Grade can
price their issue at whatever price band, provided
they are able to properly market the issue.
 We could observe that almost all of the PSU IPOs
and FPOs have registered positive returns,
meanwhile majority of Private Sector IPOs
registered negative rate of returns.
 Yet, an interesting finding is that the top
performers in the IPOs are from the private
sector.
 Hence, there are good notes and fake notes.
We shall not harm the good ones, but by

strengthening our evaluation and monitoring
system, we could easily prevent the fake ones
that overprice their issue.
 PRIMARY MARKET should be for the
accumulation of scattered savings into
Capital Stock of the Economy.
 There shall be a proper rate of return for
the individuals who put their hard earned
money trusting the regulatory framework.


Vineeth IPO CUSAT

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Investment is a current sacrifice

{Commitment of Funds} in the anticipation

An investment is one operation which, upon

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 2

Due to better literacy rates and accessibility

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 5

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 6

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 9

 One year holding period would be exhibiting

P1 = Price at the end of holding period

P0 = Price at the beginning (here, IPO price)

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 11

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 12

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 13

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 14

ALKALI METALS 38.59%

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 15

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 16

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 19

 As the beta coefficients are found to be less than 1,

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 20

“Only buy something that you’d be perfectly happy to

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 21

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 22

 IPO grade 2: Below-average fundamentals

 IPO grade 3: Average fundamentals

 IPO grade 4: Above-average fundamentals

 IPO grade 5: Strong fundamentals

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 23

a wonderful company at a fair price

a fair company at a wonderful price.”

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 27

We shall not harm the good ones, but by

KM Vineeth(vineethkmenon@gmail.com), KR Shabu (shabukr@gmail.com) 30

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