Missed investing in an IPO?

Everyone seems to think the best way to make money in this bull run is by applying for an Initial Public Offering only to sell it soon after.

I too buy that logic. But, sometimes, life is not that simple.

Here's what you can learn from my experience.

Spotting a winner

I applied for 1,500 shares of Gujarat State Petronet Ltd -- the GSPL IPO in January. And was most upset when the entire application amount of Rs 40,500 stared mockingly at me in the form of the return cheque issued by the registrar.

My agenda was straightforward: Buy GSPL at the IPO stage and sell it when it is listed (available on the stockmarket for trading). Read How to make money in IPOs where this strategy is explained.

I was sure the price on listing would be 40% to 50% higher than the IPO price and I would make a killing.

I was also positive the stock price would eventually fall after the excitement died down and the stock began to get quoted at reasonable valuations. At this juncture I would be able to pick it up again later at a lower rate.

This way I get to invest in the stock as well as make a neat profit on my investment. 

The back-up plan

Since my well thought out plan failed when I was not given an allotment, I had no choice but to go for Option 2.

The fact that I lost the opportunity of making a quick buck in no way implied I would not make money on this stock. I picked it up from the secondary market instead.

The price band during the IPO was fixed at Rs 23 - Rs 27. On the day it was listed (February 16), it opened at around Rs 45 and hit a high of Rs 47.

The back-up plan too was falling apart.

The next day it dropped and I wasted no time. I started accumulating the stock, by buying 100 shares at a price of Rs 41.90 per share.

I kept buying it over the days and have since have accumulated more than 250 shares at an average cost of around Rs 39 per share.

Now that the stock is quoting at around Rs 35-36 levels since the past week, I'm determined to buy an additional 150 shares; this will take my tally to 400 shares, the lot that I'd applied for during the IPO.

Why did I pick it up at a higher price?

I must admit, the sole purpose in accumulating the stock is to make a profit.

I plan to sell these shares at around Rs 200 per share after five years. I have resolved to be least concerned if the price dips abysmally in the short run. Behind this confidence is the fact that I am extremely bullish on the company's business model.

GSPL is a gas transmission company and its future revenues will be high as the Indian economy grows and requires more gas to rev up an 8% plus GDP growth for the next five years.

The company is in the business of transporting gas; the more gas it transports over longer distances through its pipelines, the more revenues it will generate, leading to higher profits.

Lessons to be learnt

This logic/ argument I have applied above can be stretched to any other stock you are bullish about.

The questions to be asked are:

1. Is the stock worth your attention and money?

2. Would the stock post solid returns over a long-term horizon?

If these two questions are answered in the affirmative, you should invest irrespective of whether the Sensex is above 10,500 or at 3,000.

Conviction in a company's long-term business prospects and the returns that it can generate for its shareholders should be the key to one's investment strategy.

I'm positive on both the counts on GSPL.

This also teaches us another lesson. If you are not convinced about a company, don't buy its shares. You will be taking a fair amount of risk if you invest in an IPO with the sole intention of selling it when it is listed.

What if the price slumps on listing, preventing you from making a quick buck?

If you sell when the price dips, you could end up losing a fair amount if you sell.

Or, you would just have to hold on to it and hope it will eventually rise.

If you are convinced of the fundamentals of the stock, you will not be too concerned. If you bought on the suggestion of someone, you will.

Also, much depends on the timing of your sale. The price may rise on listing, but you may hold on for just a few days longer and it could slump.

Those who invested in the Jet Airways IPO at Rs 1,100 per share were thrilled as the share price kept rising.

Soon after listing on March 14, 2005, the price rose. It was Rs 1,339 per share and rose to Rs 1,361 on June 1, 2005.

However, after that, it has generally been going downhill. On December 6, 2005 it touched Rs 1,269; on January 6, 2006, it was Rs 1,148. On February 3, 2006, it was Rs 983. On March 8, 2006 it was 992.

Those who bought it at the IPO stage did not sell at the initial levels would be very disappointed unless they were long term investors. 

So go ahead and invest in IPOs but be aware of the risk associated with it.  

Moral of the story?

A cynic might argue I paid a whole lot more than if I had got the allotment during the IPO at the rate of Rs 27 apiece. Point well taken, but then there was no guarantee that I'd have got all the 400 shares that I'd applied for.

Let me give you an instance related to the same IPO. A friend, on the advice of his shrewd chartered accountant, applied for 3,000 shares amounting to a total of Rs 81, 000.

Given the level of over subscription, he got 250 shares and the balance amount was returned to him. However, he did gloat over the fact that at least he got something from the IPO.

Another lesson to be learnt. If you want to stand a chance of getting an allotment in an IPO, apply for a huge amount. My friend's Rs 81, 000 was double of what I'd applied for!

Finally, though, whether you get the shares or not is not up to you. So you will just have to wait and watch.