Why are IPOs overpriced?

Note – I have written about Pricing (Over & Under) of IPOs in detail recently. You might want to read that article – Why are IPOs Overpriced and come in Rising / Bull Markets?

If you are reading this post, chances are that you have already burnt your fingers in IPOs. 🙂


Do you remember the days when you submitted your IPO applications thinking that you will sell your allotted shares on listing day for a handsome gain? But after listing, prices never moved above the IPO price… Or worst still, they fell so much that you decided never to invest in IPOs again. We all remember what happened to Reliance Power’s IPO, isn’t it?

reliance power overpriced ipo
Example of IPO overpricing : Reliance Power
So why it is that IPOs are more of a losing proposition? Why is it that they say that the word IPO, does not stand for Initial Public Offering..

It stands for…

It’s Probably Overpriced (IPO)

🙂

You may say that you made money in IPOs of Coal India, Mundra Port, Career Point, CARE Ratings etc. We don’t deny it. Even we made a killing in a few of the IPOs. But largely speaking, IPOs tend to be overpriced. And when we gave a thought to it, it actually made a lot of sense.

IPO overpriced
Source : Google
If you give a serious thought to why companies go for IPOs, you would understand that the whole point of going for an IPO is to overprice the share offering!! The very purpose of a company to do an IPO is to raise as much money as possible.  They are not here to do any favors to anyone. They need money and want to have as much of it as possible. For a moment, let’s digress from the IPOs and assume that you want to sell your house. You will try to get the maximum out of the buyer, isn’t it? It’s natural. Everyone wants to get a better deal.

So if you are an investor (or rather a trader looking for short term profit), and have burnt your fingers in any of the recent IPOs, then you have only yourself to blame. It’s because you have misinterpreted the primary purpose of an IPO.

Note – Not all IPOs may be overpriced. You need to do you due diligence before investing your hard earned money.

Disclaimer: No positions in any of the above mentioned stocks.

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DĂ©jĂ  Vu?? Reliance Power (2008) & NTPC (2013)

As soon as we read this, we had a feeling of Déjà vu…


DĂ©jĂ  vu, according to Wikipedia, is the phenomenon of having the strong sensation that an event or experience currently being experienced had been experienced in the past.

You must be wondering why? The reason is…
2008 – Reliance Power’s IPO – About 2 Billion Dollars – Sensex near All Time High

2013 – NTPC’s Offer For Sale – About 2 Billion Dollars – Sensex near All Time High
Power Stocks : Deja Vu??
Striking similarities, isn’t it? Both companies belong to power sector, both are coming out with almost equal offer sizes and markets in both cases are trading near all time highs.
But similarities end here and there are some marked differences too:
  • In 2008 (Jan-Feb), Sensex was trading at multiples of 24x. As of today (Jan-Feb 2013), Sensex is closer to 19x.
  • Reliance Power did not have any assets at the time of IPO (2008). On the other hand, NTPC (2013) has an installed capacity of about 40,000 MWs.

We should pray that similarities end here itself. This is because if what happened after Reliance Power’s IPO (Great Crash of 2008-09) gets repeated in 2013, once again there would be massive erosion of investor’s wealth and confidence.


Disclosures: No positions in Reliance Power or NTPC.

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