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Persistent Lists at a 30% Gain, Bad for IPO Financing

The recent IPO of Persistent Systems was hugely oversubscribed – over 92 times. Yet, today’s listing, in a market that is at a two year high, was strangely benign. The IPO was built at Rs. 310. The stock opened at 361, touched a high of 447 in minutes and then worked itself into a small range between 400 and 420 for the rest of the day. I thought we’d see a line from bottom left to top right, but here’s what it looks like:

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Perhaps, like the mega starrer Sholay, it will take some time before it shoots up? The stock has a great P/E compared to peers, but obviously the falling dollar – at 44.45 today – can hit profitability.

Let’s now get into the boring but highly informative world of IPO financing. I’ve been told of “innovative” IPO financing by brokers; some of them offered 95 lakhs of financing for the 15 day IPO, if you put in 5 lakhs of your own. At that leverage, you could hope for some allocation, they said, and of course they would “prop up” the price on listing.

Let’s do the math: for the 95 lakh loan at about 12% a year, you’d pay Rs. 47,500 for financing the loan for the 15 day IPO period. You’d apply for about 33,000 shares and hope for the best.

Going with the basis of allocation you might have got about 316 shares (the non-institutional portion was oversubscribed 106 times). If you sold at the high of the day, you made Rs. 130 per share, which gives you only Rs. 41,080. If you could only sell at the close, your gain was Rs. 100 per share, or a 31,600 rupee gain.

Your payout is Rs. 47,500. Your maximum potential income is Rs. 41,000, and more realistically, Rs. 31,600. This, on an issue that gained 30% on listing. IPO Financing #fail.

You think you might have got the loan and used ASBA (Application Supported by Blocked Amount) to get some interest for the 15 day period, say 5%, which could offset your interest payout. You silly fool. Of course they don’t let you do ASBA; you have to apply through that broker, who’s going to make that extra interest as well.

Don’t get suckered by IPO financing. Someone’s laughing all the way to the bank, and it’s not you.

Also read: The cost of IPO Funding.

  • Kiran says:

    >I think the assumption is the listing gain would be more than 30%. It's crazy (but Mindtree consulting did go up more than 30% on the day of listing). IPO financing works only if the listing price goes 40-50% higher than the bid price. What are the odds of that happening? Well, optimism and stupidity know no limits.