How do IPO’s fare in Secondary Market?

By Sundaramurthy Vadivelu

Important Disclosure

The views expressed below are the opinions of the author based on theprinciples of technical analysis, a science that has been tested and proven formore than hundred years. The views are unbiased and informative in nature.These do not constitute an offer to buy or sell stocks. Every effort has beenmade by the author to ensure correctness of the information presented. The author cannot be held responsible for omissions, mistakes etc.

Investing or trading in stock markets is a high risk activity. Those who cannotafford to risk their money should refrain from dealing in stocks.

The author has no vested interest in any of the stocks mentioned. He and/or hisclose associates may or may not be having positions at the time of writing thisarticle.

The reader needs to understand that this article is purely for informativepurposes only and all transactions, if entered into by him will be solely at his risk.

The author does not guarantee that the projected targets will be achieved withinthe stipulated time frame.

Source for the price data displayed in graphics and tables:

National Stock Exchange of India Limited, Mumbai, India (www.nseindia.com).

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IPO or Initial Public Offer facilitates a company to sell its equity shares toinvestors, usually for the first time. There are two ways a company can allotequity shares to investors:

1. Fixed Price Option in which company fixes the issue price.

2. Book building method, in which company fixes the floor price and theprice range for bidding by investors. The investors need to bid for equityshares between the range fixed by the company.

The difference between the two, apart from price is that the demand for thesecurity can be known every day in case of book building whereas in fixed priceoption it can be estimated only after the issue closes. The allotment price will beinitimated to the investor after allocation of shares.

A company can issue IPO’s either by fixed price option or book building methodor a combination of both. Now a days book building is more common.

When an investor applies for an IPO, he reads the offer document and if satisfiedwith its contents, risk disclosure etc. he proceeds further with the applicationprocess.

However, after the stock gets listed in the exchange and trading begins, we findthat funny things start happening. Obviously no price volume data will beavailable before the stock gets listed, and as trading goes on, the technicalanalyst will be able to understand the price action.

Before one invests in IPO, he has to realize this fact and it is one of the marketrisks. Companies with good fundamentals and decent corporate results havestruggled in the stock market.

Let us study each case with an illustration.

Educomp Solutions Limited:

Issue price was Rs.125. The stock has skyrocketed to Rs.1880 as on28.05.2007. So, the investor has gained about 15 times in 16 months time. Nice thing, if one had the vision to anticipate such price.

Let us examine the weekly chart of EDUCOMP shown below.

Every rise was followed by a corrective decline or sideways movement as it canbe seen in the chart. This is an indication of a healthy bull market.

This is an example of an ideal case where the bulls were in perfect control overthe stock.

Jet Airways (India) Limited:

It was allotted at Rs.1100 per share 2 years ago. It has been struggling eversince it got listed. Nice airline with good financial results but in the stock marketit is truly an underperformer. I have read reviews of Jet airways and they fly toSouth East Asia, Europe and USA (from August 2007) as well. Their serviceseems to be very good, I understand from the reviews. The net profit for thefinancial year 2005 – 2006 is about Rs.452 crores or Rs.4.52 billion. But let ussee the weekly chart of jet airways for a while.

It continued to form lower highs and lower lows till about late July 2006. It fellfrom 1383 to 475. It was bullish till mid February this year and managed to closearound 786. As can be seen from chart, it broke its support trendline andreached another low. Stock seems to be bearish and it is quite possible thatfurther lows may be reached. Unless it closes above 805 which will be horizontalresistance line one should not expect much from this stock.

Bombay Rayon Fashions Limited:

Issue price was Rs.70. Textile stocks have been witnessing a steep fall thesedays but this one is attempting to test its previous high.

It was almost non stop rise from 80 to 258.60 followed by a downtrend to a lowof 102.50. It managed to break its previous high and touched a high of 275.50during the next uptrend. But since its support trendline has been broken, it mayface strong resistance at its previous high.

This is a remarkable stock considering the bearish trend among popular textilestocks like Arvind Mill, Alok Textiles, Bombay Dyeing, Raymond etc.

JHS Svendgaard Laboratories Limited

The stock was allotted for Rs.58. But it was continuously bearish and reached alow of 27.50. Currently it is bullish and a close above 43.20 is likely to take thisstock further up.

There is nothing wrong with this stock technically. Uniform price volume patterncan be seen in case of both uptrend as well as downtrend. It has closed aboveits resistance trendline. One will have to wait and see whether it closes above itshorizontal resistance line at 43.20.

Reliance Petroleum Limited

Issue price was Rs.60. The stock touched a high of 105 in the listed week butthere was not much of activity for the next 10 or 11 months. It turned bullish inlate March this year and very likely to test its previous high soon. Its previouslow of 58.05 has not yet been broken, though it did come close to it at 58.10.The chart looks like a bowl – very unique.

Shree Renuka Sugars Limited

It was issued for Rs.285. After that it skyrocketed to 1665 and fallen again allthe way to 260.10. This again is unique – all this happened in about 18 monthsor so. Though currently bullish, because of the absence of clear waves, it islikely to face resistance around 917. One of the few sugar stocks the crowd isinterested when many others are on a downtrend.

Conclusion:

Investing in IPO’s has its own potential risks and rewards. Some are runawaysuccesses whereas some others have miserably failed. So, before you put yourmoney in IPO please be aware of this fact. Each stock does behave differentlybut understanding what IPO and how it fares in secondary market will make theinvestor little more knowledgeable.