More than 60 Initial Public Offerings (IPOs) are on the cards for next year, but they will not be as successful as the IPOs seen this year, as retailers are disinterested with the weak performance in share prices of IPOs during the past month after they opened for trade in the stock exchange, according to some brokers.
Munchee Biscuits; Expo Lanka - an import and export, freight forwarding and logistic firm; Sierra Construction Ltd; HVA Foods Ltd - an exporter of branded tea and related products; Pelwatte Dairy; Softlogic, SriLankan Airlines, SriLankan Catering and Litro Gas are some of the firms which are gearing for IPOs in 2011.
“They (retailers) should ignore all IPOs and concentrate on trading at the secondary market instead as the recent IPOs have not performed well at the stock exchange after they started trading,” a stockbroker noted, adding that IPOs sizzling capacities may well have ebbed by next year.
He explained that a retailer will drum up some Rs 100,000 and apply for an IPO which will see him own about Rs 1,000 worth of shares. “He gets the balance Rs 90,000 about a month later without any interest (on the blocked monies),” he said, noting that recently the share prices of firms which launched IPOs have not performed well after trading. “As more and more IPOs come into the market, retailers will realise that these are not for them and start investing in the existing shares in the market (the secondary market),” he added.
However many analysts beg to differ saying that it’s all about taking calculated risks.
Ravi Abeysuriya, CEO Heraymila Securities noted that investors, big or small need to be cautious and obtain professional investment advice before investing in IPOs.
“First of all one needs to carefully assess whether they could bear the risks of investing in the new company and the prospects for the industry and individual companies’ earnings growth potential against their IPO prices and make a careful determination whether a particular IPO is worthy of investment, even if they intend to sell the very day the IPO shares start trading,” he explained.
He further added that bank facilities can be arranged leveraging several times the amount the investor is putting in cash by a professional investment advisor. “For example, an investor who has Rs.100,000 to invest can apply for Rs. 2,000,000 worth of shares by leveraging 20 times. It is absolutely imperative that the investors seek advice from a professional investment advisor, who is capable of accurately assessing the level of over subscription that is likely and arranging such a banking facility using his or her credibility and standing, as substantial part of the risk is borne by the bank in case the full amount of shares applied getting allocated,” he said.
He added that in the same example, the investor may gets Rs. 2,000,000 worth of shares by investing only Rs.100, 000, but in a worse case situation, where there is no over subscription, and if the price drops to zero from the IPO price subsequent to the listing, the investor bears that risk of only Rs.100, 000, but the bank carries that risk if the investor defaults for the balance Rs.1, 900,000.
“With this the reputation of the investment adviser who arranged the facility is damaged forever. Hence the investment advisor plays a key role in facilitating this kind of arrangements,” he said, noting that IPOs cannot be ruled out as ‘failures’ next year.
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