MOIL IPO Pricing attractive pricing band of Rs 340-Rs 375 ….but Allotment will be quite poor…Check out the Choice between MOIL and IFCI !

Government got Gold with Coal India’s IPO last month…It was a Win Win Situation all around…as Issue Size was huge the Retail Segment was oversubscribed 2.3 times and also benefited from the rollover of the unsubscribed Employee Quota …so allotments were good…max 199 shares at Rs 245 less 5% discount

And Now we have the IPO of MOIL….attractive Pricing Band of Rs 340-Rs 375….However the Issue Size is Small and the Retail Segment will be oversubscribed 20 times…..therefore the allotment will not be generous

…Now a Retail Investor can apply upto Rs 2 lakhs…….Minimum application in MOIL is for 17 shares and in multiples of 17 thereafter…..On a max application of 527 shares in MOIL expect to be allotted just 25 shares…If Rs 375 is fixed as the issue Price then with a 5% discount the cost to Retail Investors will be Rs 356.25….Currently the Grey Market Premium is Rs 240…thus on allotment of 25 shares the profitability will be @ Rs 258.75 from Cost…that’s a Profit of @ Rs 6500…thats a 3.3% return in a month on a Application of Rs 197625….that’s very good and quite probable…infact fairly certain 

…but consider this…Instead of Primary market IPO of MOIL,consider Secondary Market Investment of @ Rs 2 lakhs in 3400 Shares of IFCI @ Rs 59…IFCI has slipped sharply in this correction and is available at Book Value this year and is to apply for a Banking Licence….If it moves up by just Rs 3 to Rs 62 ,the gains will be Rs 10200…There is a strong probability that it may move up much higher in December but there is also a probability that it may drop even below Rs 59 ! 

So what would you choose ?…a certain smaller gain with little or no chance of any Loss or a bigger probable gain with some probability of loss too in December 2010 ! 

Loss Aversion Psychological Tests conducted by D Kahneman and A Twersky are quite revealing…They gave these Options to a Group to choose from

A : A sure gain of US $ 250

or

B : 25% chance of a Gain of US $ 1000 and 75% chance of no gain at all

84% of the Group opted for A over B ( with the same expected payout but much greater risk)

They then reframed the Question and asked the same group to chose from

C : A sure Loss of US $ 750

or

D : A 75% chance of losing US $ 1000 and a 25% chance of losing nothing at all

73% preferred the gamble (with an expected loss of US $ 750) over the certain loss and opted for D

Stating the Question in terms of Gains and then in terms of Loss resulted in different choices

Loss Aversion implies that Individuals will prefer an uncertain gamble to a certain loss as long as the gamble has the possibility of no loss even though the expected value of the uncertain loss is higher than the certain loss

Interesting !

So which would you choose to Invest in ?

A : In the Primary Market IPO of MOIL with a certain lower gain

or

B : In the Secondary Market in IFCI with a high probabilty of a higher gain but also with a probability of a loss

My Choice would be B…what would be yours ?

One could do B and hedge it with A too…If B wins out in December it will be a Win Win situation all around

Making Choices in Equity is surely great Fun !

Cheers !

 

5 thoughts on “MOIL IPO Pricing attractive pricing band of Rs 340-Rs 375 ….but Allotment will be quite poor…Check out the Choice between MOIL and IFCI !

  1. How about chosing Option X?
    Apply for the FPO of Shipping corporation with post FPO Book value of 160 & offer to retail at 133. Assuming SCI trades at book value post issue. Thats a gain of 20%!
    And since ‘investor psychology’ says ppl. always prefer ‘newer/sexier’ issues retail portion won’t be subscribed by more than 2 times(maybe even less since most would be investing in MOIL ignoring SCI).
    Leading to PROBABLE gain of 20,000!
    Whats more you get a dividend yield of 4% with possibility of higher dividend payout this year, which other large size PSU’s gives you that kinda yield?
    Feedback would be appreciated Gaurav

  2. Let’s go Sailing Swaroop !….Post FPO the Equity of SCI will be Rs 465.8 crores with Reserves swelling past Rs 7000 crs this year…Book Value would be Rs 150+…CMP is Rs 143 now…towrds a 52 week low of Rs 139 in Feb 2010….EPS would be better this year as last year was hit by recession and FX loss….Rs 14 EPS should come through….so the FPO Pricing at Rs 135-140 is a ten multiple….not expensive….however FPO appetite has been low….I’m with you though….8.47 crs shares on offer with half as fresh issue….Retail Segment needs just over Rs 300 crs for a one time subscription…so this too may get oversubscribed well….furthermore SCI at Rs 175 Pricing on the exchange seems a little distance away…52 week High though was Rs 202 last month……there is not much downside in the SCI FPO…. however IFCI has an immediate great trigger of itching to apply for a Bank….as I stated Making Equity Choices can be great Fun !

  3. MOIL is already oversubscribed more than 7 times in retail.still one day left.and most of the people apply on last day only..On the other hand markets are experiencing mild recovery which may continue for time. i go with IFCI.. market may turn very volatile.and you should be ready for a roller coaster ride…

  4. Dear Sir – Would like to draw your attention to an interview with Mr.Rai of IFCI yesterday on CNBC. This caught my attention :

    “Q: Let’s talk about what is going on with your own company; there have been a lot of talk about consultant being appointed for a strategic sale whether or not there could be a banking license. Where have talks or things progressed on that front?

    Rai: As far as banking license is concerned, there is a long wait. We want RBI to come out with the final guidelines and clear the way forward. IFCI believes that banking license was a part of its destiny which it missed way back in 1995 for whatever reasons and that it would like to renew its claim upon banking license as and when those licenses become available. So, this is our side of the story.

    I do not know how the government, which is another important stakeholder in IFCI, in terms of having provided support while we were a development financial institution. How they look at banking license for IFCI. But I would imagine that in terms of framing up the guidelines for banking license IFCI would have a very strong claim both from the financial perspective, from the ownership and management and control perspective. So, it would be hard to imagine that there could be a set of guidelines for banking license which IFCI isn’t able to fulfill. So, we look forward to that.

    I think in some ways the question of inducting a strategic investor from our perspective seems passé now because the strategic investor had become relevant when this company was not able to find a direction on its own. I do not think whatever our critics might say that that is the case any longer. IFCI has been performing very strongly, it has been growing its balance sheet quite well, utilising its capital, making its footprint, making its presence felt in the financial sector by expansion of the balance sheet size, but also the quality of the financial intermediation which IFCI has been able to bring about. So, all these things are very positive signs. Therefore, the strategic direction or investment or financial let us say augmentation of IFCI resources is no longer a concern so much. So, I do not think how it can be argued that this management should look at induction of strategic investor today when the circumstances have changed a whole lot from October 2006, when this option was being considered.”

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