Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Stocks

Mindtree has listed, and cost of IPO funding

Mindtree solutions has listed today on the NSE. (See my IPO analysis). It turns out that the issue was phenomenally oversubscribed (100 times) and the allocation basis is now available.

If you had applied in the retail segment, you would have got only 15 shares regardless of the amount of application. And that if you were lucky, because the selection of people to get these shares were on random selection. For the lowest lot (15 shares), only 3 out of every 86 applications were given allotment (3:86 ratio). For the highest retail size (225 shares) the ratio was 52:99 (nearly one in two). But all successful allottees got only 15 shares.

Now the share has listed today at around Rs. 627. This is nearly 50% higher from the IPO price of Rs. 425. But you have to consider the cost of the IPO itself, for you. Let me show you how this might work against you.

Let’s say you borrowed Rs. 96,000 to invest in this IPO, at 18% interest. That’s 1.5% per month and you think, I will invest and give the money back on listing after a month. You then apply for 225 shares (Rs. 95,625) and wait.

Now you are a lucky allottee and get 15 shares, and it lists at Rs. 627. How much do you make as profit? Rs. 3,030. But in this one month you have to pay an interest of Rs. 1,440 for the amount you borrowed. Your real profit after all things are considered, is around Rs. 2,000 – which is next to nothing!

But what if you have the money in your bank account? Even then, the cost of the money for 225 shares is about Rs. 630 (at 8% bank deposit rate). and the net profit you end up making is Rs. 2,500 or so. That’s a good 2.5% in a month – which is definitely a good deal! But a) you should be lucky to get the allotment and b) sometimes refunds get delayed and that can hurt because of the paperwork involved.

Also there is a significantly lower return if you are investing high amounts (greater than 1 lakh). Allocations to HNIs was a lower ratio, and the returns were lower. Like if you notice the basis of allocation, an application for 23 lakh shares got an allocation of 18,537 shares. That’s an investment of Rs. 100 crores, for a net profit of 38 lakhs, translating to only 0.4% of the money invested.

But this is one kind of IPO were there was huge oversubscription. Others may not involve that. For instance the Opto Circuits FPO last year (at Rs. 270) was just about subscribed – and that was a follow-on issue, with the existing share price on the last day of the issue going at Rs. 300 – people did not even invest with an obvious 10% gain! And the company has since given a 1:1 bonus and the current share price is Rs. 270 – a 100% gain in a year. (Listing gains were quite high since the share moved to Rs. 450 within a few days)

My point is: IPO investing is not a guaranteed good thing. For small amounts it does have a value, but if you want to make big gains, you should analyse every issue carefully.

  • Anonymous says:

    >Hi Deepak,

    Two quick questions.

    1) In your previous post regarding MindTree you said, anything below 800 is good in secondary market. Does this hold good in this scary market fall situation also?

    2) What is your advise on present situation of the market. Is it good time to accumulate some stocks or do you see some more fall.

    Thank you…

  • Anonymous says:

    >Hi Deepak,

    How is MindTree in comparison to Tech Mahindra?If one has to take a call between the two which one should be bought?

    Thanks,
    Anshul

  • Deepak Shenoy says:

    >Anonymous 1: – Mindtree is still a good call. They’ve acquired two companies and those results will come in the next qtr results too. This is a good buy at this price – I’m buying!

    2. Present situation: No big deal. There is no reason for the fall, and I’m buying with a little bit of money every few days.

    Anonymous 2: Mindtree is a far lower P/E multiple than TechM (P/E of 30) but TechM is much bigger (they make 3200 cr revenues!). Mindtree is only at 450 cr. but I expect it to move much faster from here.

    Note, I now own shares.

  • Vikram says:

    >Deepak
    You’re absolutely right. The cost of an IPO is also a function of the time period of capital deployed. I have not been alloted anything and have yet to receive an allotment. Although I did not take a loan for investing in the IPO,whats worse is that I don’t have funds now to buy good stocks in the current market at cheap prices. ๐Ÿ™

  • Anonymous says:

    >Hi Deepak,
    do you think it was right on the part of mindtree to give the allotment status to the employees after the stock got listed ? so that they dont sell it off on the listing day

    i would think it may have been ok if the company gave the shares at some special discount price.

    Thanks
    Kiran

  • Deepak Shenoy says:

    >Kiran, Anyone could have got the allotment status from their application number – I know a few mindtree employees that got their allotment status three days prior to the listing…

  • RaviAranke says:

    >Deepak,

    Good analysis.

    You have taken into consideration the time value of money tied up.

    One should also probably take into account the value of time – converted to money at your hourly rate. Say, you make 32K net per month and work about 160 hours per month. Then your hourly rate, for the sake of this simplistic calculation, is 200 Rs. per hour. Now, calculate the time taken for all the paperwork and followup and calculate the real profit you would make.

    Regards,
    Ravi

  • Anonymous says:

    >Is this right ?
    Instead of applying directly in market, I had given money (for 100 shares) to a mindtree employee who said she will apply for 200 of her own..

    now she says she had applied total 660 of which she got 170 shares (25%) now she says she is not giving me any shares ๐Ÿ™
    Is it possible that since the employees quota also got oversubscribed so they gave a 25% of what they applied coz i want to know if she got some shares because of my 42.5k !

    Cheers
    Amir

  • Anonymous says:

    >Amir,

    I am a MindTree employee. Yes, your understanding is correct. We were given 25% of what we applied for as the employee quota was oversubscribed by 3.875 times. If the 660 shares that she applied for, included your money for 100 shares, she morally owes you 25 shares.

  • Uday says:

    >Hi Deepak,

    I am new to investing. Started reading here and there about investing and business. I have few doubts. I will keep on posting them. I hope you will find some time to answer these.

    M&M has offered Rs. 360 per share for Punjab Tractors. Still this script is trading around 308 . Why this deal didn’t push the share price up? I could not understand.

    Around 200 companies are going to announce dividends. Does it profitable enough to buy these shares, so that we can enjoy dividends? As per your Investment Fundas, (Yes I read 70 % of it) share price does not go down after dividend. But I don’t know about quantitative impact. Can you throw some light on this aspect of dividends?

    Thank You.

    Uday.

  • Deepak Shenoy says:

    >Uday: Punjab tractors has the problem that M&M has only offered to buy another 20%. That means they are not buying it all out, so the price will be lesser. To give you an example, Reliance bought IPCL shares from the govt long time back at around 195-205, but the share was doing only about 170 for a long time after that.

    Share prices do come down by the size of dividend. Because the market has factored that much cash into account already. But that is an assumption – most investors don’t discount the cash that a company has (they only consider earnings growth etc) which means soon the share price (usually) goes back up to previous levels.

    Don’t consider dividends alone – buy only if the company is good.

  • Anonymous says:

    >Amir,

    Your friend has in principle broken the ‘Integrity Policy’ of MindTree. The Employee Quota was meant for employees and NOT for friends/relatives of employees. If you pass on the name of your friend to the officials of the company, she would be asked to leave/fired for this shameful act.

    Your friend is really an insult to a wonderful organization called MindTree.

    Let your friend know that she has violated the integrity principle of the company.

  • Anonymous says:

    >Hi Anonymous,
    Thanks for the suggestion. I know that they had a ‘integrity policy’ and she has violated it in practice not just in principle. I am sure many of the Mindtree employees would have applied for others (how else do we explain the 7 times over-subscription of the employees quota)
    But she also broke the trust i put on her. Anyways i don’t want to do any kind of harm to her or tell her how big a bitch she is. People who act cheap like this wont make a fortune out of their cheap attitude. I just got back my money from her and learnt a good lesson for life ๐Ÿ™‚

    Cheers
    Amir

  • Anonymous says:

    >Hi Deepak,
    This is a good analysis. Many times we fail to forsee some expenses in the greed of making some money.
    I have a question for you. If i take a personal loan at 12% (for 5 years) from a bank and lend it myself to a local businessman whom i trust at 24% per year (for 3 years), is there anything i am failing to see in this ? Is it legal to do this ?

    Thanks
    Kunal

  • Deepak Shenoy says:

    >Amir: You’ve learnt your lesson, which is a good thing. When it comes to money, sometimes even good friends change colour! Forget about it now.

    The integrity issue is weird. Morgan Stanley was lending all employees ridiculous sums of money (10 lakhs plus) to buy shares. At 18%-24% interest! If it is fair to take money from Morgan Stanley at extremely high rates, it is fair to take it from friends/Family too. Anyways.

    Kunal: THe thing here is “risk”. The bank lends you money knowing that it can collect from you. So the risk is lower, so they charge lower interest. Your risk is that the businessman may not pay – what will you do to collect? If you are confident of collecting, then by all means go ahead. If you are able to collect, the premium you earn (extra interest) is your rewared for taking higher risk.

    And if course it’s legal. Banks do it all the time – they give out 6% on deposits but charge 12% for loans, no?