IPO: Don't sell your shares on the day of listing

To sell or not to sell the IPO (initial public offering) shares on the day of listing? This is the question that remains uppermost in the minds of investors who get shares allotted in an IPO.

The year 2007 seems to have answered this oft-thought about question. An analysis of price movements of 79 of the 102 IPOs that listed this year till December 17 shows that investors would have been better off had they not sold their shares on the day of listing.

For, a good 60 per cent -- or 47 -- of the 79 IPOs under consideration appreciated further after posting gains or otherwise on the day of listing.

For instance, Orbit Corporation closed with a premium of 16.32 per cent when it listed on the bourses on April 12 this year. However, if investors would have been patient and held onto this stock till December 17, they would have gained a mind-boggling 623 per cent!

We have considered only those shares that have completed at least three months of trading after the day of listing. This explains the gap of 23 IPOs that are not considered in this analysis. Experts believe that three months are enough for any company to get its price discovered by investors.

Another case in point is Gremach Infrastructure Equipment & Projects Ltd., which listed at a discount of 2.38 per cent on April 11. However, by December 17 the stock price had skyrocketed to Rs 333.30, a gain of 287.56 per cent in a span of 9 months.

"Most investors -- and that include retail investors, too -- borrow money from banks to invest in the IPOs. So it makes sense for them to sell their allotment on the listing day if they make decent gains after discounting the interest they pay to the banks," said an investment advisor who also offers consulting services to a few hedge funds in India requesting anonymity.

Others that feature prominently in this list of super gainers include Everonn Systems India Ltd. (241.75 per cent on debut, 424.25 per cent on December 17), MIC Electronics Ltd. (123.77 per cent, 402.10 per cent), Pyramid Saimira Theatre Ltd. (58.20 per cent, 316.05 per cent), Global Broadcast News Ltd. (104.04 per cent, 286.42 per cent) and Redington (India) Ltd. (44.47 per cent, 245.00 per cent) to just name a few.

However, there is a small twist in the tale here, too. 32 IPOs out of the sample size of 79 did better on the day of their debut or have sunk further. To be precise, 9 IPOs from this group did better on the day they listed as compared to their closing price on December 17. These, like the remaining 23 in this group, actually fell in value over the period under consideration.

Prominent amongst the former in the above group are Cambridge Technology Enterprises Ltd that listed at a premium of 163 per cent on February 7 and by December 17 pared its gains to 120.26 per cent, SEL Manufacturing Company Ltd (58.67 per cent, 24.28 per cent), Pochiraju Industries Ltd. (63.83 per cent, 15.83 per cent), Lumax Auto Technologies Ltd. (47.47 per cent, 12.67 per cent), MindTree Consulting Ltd. (45.95 per cent, 10.52 per cent) and Roman Tarmat Ltd. (82.77 per cent, 8.91 per cent).

In other words, investors would have lost an opportunity to make money in these stocks had they not sold them on their debut. "But most of these companies that have lost in value after listing may not be good companies fundamentally," explains the same investment advisor. "Perhaps, that's the reason why people jumped ship mid-way in a lot of these losers."

So, what's the moral of the story when it comes to investing in IPOs and making money? "Patience always pays in the long-run. The only caveat is people should put their money in sound companies with solid fundamentals and a management with good track record," is how he answers the 'to sell, or not to sell on listing day?' conundrum.

Source: Rediff MoneyWiz