July 13, 2011 (LBO) - Sri Lanka's initial public offer fever has been cooling for a while and several recent IPO stocks have fizzled out after early spikes. But Tuesday's debut of Softlogic Holdings was particularly bitter medicine.
Softlogic, which has interests in healthcare and consumer durables, opened at 25 rupees, below the issue price of 29, the first post-war IPO to do so. The stock dipped as low as 16.20 rupees before closing at 18.00 rupees.
Several other stocks have since tumbled below the issue prices, though they rallied initially.
Herd Behaviour
"In Sri Lanka the public sometimes invests on a herd instinct," says Ravi Abeysuriya, head of Heraymila Securities, a Colombo brokerage.
"People do not study the prospectus. And they may invest in something where the downside risk is high.
"Because a series of IPOs performed well at the beginning people expect to sell at the opening day at a higher price."
The first IPOs to come after a 30-year war ended in 2009 did make money for investors.
Channa Amaratunga, an independent analyst, says the first issues were "reasonably priced and left something on the table for investors, which resulted in sharp gains upon listing and euphoric investor sentiment."
"The pricing of some recent IPOs though has been relatively more aggressive, especially on a recurring basis," he says.
Investors who bought Softlogic at 29 rupees were hoping to unload the stock on someone else. But this time there was no one to buy.
Private Placements
There were enough sellers to sell below the issue price and still make big capital gains. They bought into a private placement at 7.20 rupees over a year ago.
Expolanka Holdings sold stock at 14 rupees to the public after placing shares at 6.00 rupees among a clutch of investors earlier. The stock is now selling at 13.40 rupees.
"Pre-IPO private placements at heavily discounted prices to the IPO price have also contributed in no small way to the recent under-performance of certain IPOs," observes Amaratunga.
"While the pre-IPO private placements do not affect valuations, they have negatively impacted on sentiment and perception."
Vallibel One, which had an IPO and private placement at 25 rupees, is still above water. When private placements are not done at steep discounts there is less selling pressure. Such pricing does not say anything about fundamental value either.
Another IPO stock that is trading below its issue price is Free Lanka Capital Holdings, which got most of its profits from plantations.
In March it sold shares at 5.00 rupees after doing a placement at 4.70 rupees, just before a wage hike. On Tuesday the stock closed at 3.90 rupees.
Union Bank sold shares at 25 rupees in February. The offer was oversubscribed 345 times with punters using bank guarantees to increase their allocations, knowing that they will not get all they asked for.
Credit Driven
Most of the demand for IPOs was spurious, helped by low interest rates and excess liquidity in banks. There was little real demand from investors who had studied the stock and wanted to hold it for growth.
After the war overall market was also being steadily re-rated up, first on fundamental value as the valuations caught up with the region. Then on broker credit, margin trading and herd instinct.
When foreign investors started to sell out of high flying stocks with twenty plus earnings multiples, state managed funds bought into the market, adding liquidity.
Meanwhile retailers and a few big fish, known in local parlance as 'guramiyas' (a type of large freshwater fish) started punting up illiquid stocks, driving the broader all share index up even as the Milanka index of liquid stocks - which was harder to manipulate - beat a retreat.
Regulators who feared the bubble may get bigger and crash down harder, clamped down.
But now the broader index is also in retreat, partly due to new issues sucking money out of the market. On Monday stocks slumped 2.0 percent, followed by another 1.5 percent fall on Tuesday.
The overall market trends also weighs on IPO sentiment.
Disclosure
Some brokers also issued buy recommendations to high priced IPOs. There is no practice in Sri Lanka to issue a report that advises clients not to subscribe or to buy in the secondary market when the issue is likely to trade lower.
Anyone who dares could be accused of sabotage, or even being part of an "international conspiracy" of treachery or "being unpatriotic."
But of late, some firms have stopped issuing reports on IPOs.
"We verbally tell clients not to subscribe," a broker who declined to be identified said.
Brokers were also not keen to advice clients not to buy because all IPO stocks moved up on the first day regardless of fundamentals. But stocks with steeply discounted placements could also move down, regardless of fundamentals.
Some firms backed by influential figures are also able to arrange 'market makers' - including from state funds - to buy stocks post-IPO absorbing some of the initial selling pressure.
Nobody however forces an investor to buy into an IPO. Some mistakenly believe that the Colombo Stock Exchange or Securities and Exchange Commission 'approves' the price. But Sri Lanka does not regulate stocks on merit, just on disclosure.
Some firms have had suspiciously steep increases in their profits in the months before going public, including from one-off gains. Though they were disclosed, it is uncertain whether buyers really cared.
But now price discovery is happening in earnest, with IPOs going cold.
Second Look
In any market not all IPOs go up on the opening day. Stocks with high genuine demand are called 'hot IPOs' in foreign markets. It is standard practice in other markets to underwrite share issues, so that a big investment bank or a consortium will buy up unsubscribed stock.
The time when underwriting was mandatory in Sri Lanka is a distant memory.
But in the future investors may look harder at IPOs before buying and issuers - and investment banks that advice them - will be more cautious about private placement pricing.
"Investors will hopefully become more discerning about future IPOs and recognise that IPOs do not guarantee immediate gains always," says Amaratunga.
"Investors should above all remember though that equity investing is about long term returns - it is not the first day price or even the first month price which determines the success of an investment."
If buyers look harder at stocks, issuers would also have to respond. That’s how markets work.
"Hopefully in the future we should get issues which are more attractively priced," says Abeysuriya.
"And investors should also demand to know from the professional analysts whether or not to subscribe."
And analysts have to tell the truth.
source - www.lbo.lk
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