Be smart while investing in IPOs

While reviewing the primary market in 2006 and previewing the same for 2007 on a popular business television channel, I was asked “Does the sharp dip of a large IPO like RPL and the poor response to the IPO of Cairn Energy suggest that the market is not interested in IPO’s where earn ings visibility stretches beyond two to three years?”

At the root of my answer to this question lies a concept I always underline at the Capital Market Training Programmes I conduct, namely – Growth versus Value Investing. As I never tire of repeating, a Value Investor is one who seeks to buy into a satisfactory company at a great price, while a Growth Investor is one who seeks to buy into a great company at a satisfactory price.

Now this does not necessarily mean that RPL or Cairns are necessarily growth stocks. However, at the prices they were issued and the long gestation periods that their projects envisaged, one certainly could not play them as value stocks. While this, by default, did not make them growth stocks, there will inevitably be takers for their pedigree, their potential and long-term wealth creation abilities.

Returning to the distinction about great companies at good prices, there is every chance that one could get carried away by media hype and wrongly back a stock as a growth stock. A company that comes to mind in this context is Biocon. It has flattered only to deceive since it listed and while redemption might still be on the cards, the number of believers could fast dwindle with every failure like its statin and insulin initiatives.

At the other end of the spectrum is the above named company’s neighbour in the garden city of Bangalore, Opto Circuits, a company whose shares we hold. We had backed this stock early as a growth stock and with a 2000 per cent return over five years driven by sharp organic and inorganic growth, I must confess to it having exceeded our wildest expectations in terms of absolute returns.

The importance of backing a stock as a value or growth stock at the time of its IPO itself, helps making a critical decision as to whether one should hold or sell in the listing aftermath. Given that growth stocks (like Opto Circuits) come far and between, clearly investors in IPOs (not of the Nissan Copper variety though) are seeking value. Hence, if the price you are seeking is triggered immediately on listing, taking most, if not all of your money off the table would be the smart thing to do.

(Ashok Kumar heads Lotus Knowlwealth and can be contacted at ceolotus@hotmail.com)