Anyone going for IPO financing, in times like these, seems to be at the receiving end of the stick. Let’s take the future capital ipo for instance, an IPO that was over-subscription a few gazillion times (editor: this translates to 131 times). From the Basis of Allocation chart, let’s take a look at how people would have fared, had they borrowed money to invest in this fan dangled IPO.
I’m going to assume the cost of funds was about 12%. Typical rates are 19%, but let’s just say 12% (because you will put some of your money and borrow the rest). 12%, for 1 month (the time it takes to get your refunds back, so you can return the money you borrowed) translates to about 1%. Note that the IPO was priced at Rs 765 and the listing price on Friday closed at 909.
Retail bidders
For a 1 lakh bid, the basis says allocation was 8 shares for 6:19 – meaning about 1/3rd of applications got 8 shares each.
For the poor fellows who were part of the 2/3rd that got zilch, the loss is Rs. 1000 (interest), plus all the headache.
For the remaining 1/3rd, they got 8 shares. Profit per share was approximately Rs. 150, so they got Rs. 1,200 as profits. Of which, they’ll pay about 1% of total cost (1 lakh) = Rs. 1000 as interest. So real profit = Rs. 200 for all the trouble and the hope that refunds happen within a month.
HNI bidders
These are the real bakras. The banks have really squeezed them on IPOs. Let’s take a bid of say 16 lakhs. The allocation was 28 shares, FIRM – meaning all bidders for this size got allocation. The profit is 28 * 150 = Rs. 4,200. The interest cost is 16,000 (1% of the bid). The net LOSS for this is Rs. 12,000.
Let’s go higher. For a 65 lakh bid, allocation was a firm 112 shares. Share profit 16,000, interest cost 65,000 – net loss of about 50,000.
Even higher. 11 crore bid, got 1900 shares (approx). Share profits of 3 lakhs, interest cost 11 lakhs – net loss is 8 lakhs.
Simply put: It makes ZERO sense to borrow money to buy IPOs at this time.
Does it make sense to put your own money into IPOs? The return at the 1 lakh level is Rs. 1,200 if you’re lucky enough to get allocation – just about 1.2% for about a month. In general that is not bad, but there is too much risk for too little return. If I can get a 9-10% arbitrage return (on arb funds, post tax) I would not bother with something like IPOs; in fact if a stock lists well, you can buy on listing instead and even a small move upward will give you better returns.
(To compare – if I bought Future Capital today at 909, I will break even with the person who subscribed to the IPO for Rs. 1 lakh, if the price goes up just Rs. 15 from here. Net return at 1.5% is about the same as that)
Now this is why I don’t subscribe to IPOs anymore, and this is the reason why I did not apply to the Reliance Power IPO. It makes no sense whatsoever.
