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Be Ready to Make Only Limited Gains in Power Grid FPO

BY: Vivek SHARMA | Category: Finance | Submitted: 2010-11-13 00:35:25
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Article Summary: "Power Grid FPO got an unprecedented response from investors. This article examines potential gains for retail investors in Power Grid FPO.."

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Power Grid FPO which got closed on 12-Nov-2010 got an unprecedented response from investors. It got oversubscribed 14.77 times. What was extremely surprising was the fact that the retail segment got oversubscribed 3.18 times. Why did retail investors pump so much money in the FPO which has limited potential gains? Was it lack of understanding of FPO market or did the retail investor got overwhelmed by the return provided by Coal India Ltd.? What will happen to the retail investors when the shares offered under FPO get listed?

Let us try to examine. The Coal India Ltd. was an IPO and hence there was possibility of unlimited potential gain on listing. Coal India gave around 40 percent return to some investors (those who decided to sell at highest price) on an issue price of Rs.245. In case of Power grid the offer price is in the range of 85-90. Power Grid closed at a price of Rs. 99.60 on 12-Nov-2010 in NSE. Going by the response, the government is likely to offer shares at a price of Rs. 90 to investors. Even if the government offers shares at Rs. 85, the retail investors will get allotment at Rs. 80.75 as retail investors are entitled for 5 percent discount. This is a discount of 19 rupees on the closing price of 12-Nov-2010. If the government offers shares at 90 rupees, retail investors will get it at Rs. 85.50. This would result in a discount of around 14 rupees from current price.

What will happen to the share price of Power Grid from 12-Nov-2010 to the listing date? There are two distinct possibilities. One the share price of Power Grid will start falling from 15-Nov-2010 onwards as the price was artificially kept up to make FPO successful. On a day on which Sensex fell by more than 432 points, the Power Grid shares fell only marginally. Hence from 15-Nov-2010, there would be fall in the share price of Power Grid as the FPO period is over. Additionally global markets are looking jittery once again in view of crisis of in Ireland and over capacity building in China. If the market falls in days to come because of these reasons, the share price of Power Grid will go down further. Last but not the least, because of additional supply of share on the date of FPO listing, there would be lots of selling done by investors and this would further bring down the share price.

What should retail investor do in view of this? The investor should come out of Power Grid shares on the day of listing if share price is not above the 95. This is the 52 week low for Power Grid share price. Power Grid as a stock offers limited upside as the power sector in India has not grown on expected lines. It is better if investors decide to take profit made in the Power Grid shares and invest in a stock like SBI which still has lots of upside potential or else wait for next IPO/FPO to make money.

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