Why does it make sense to Book Profit :

Investments are always made with idea of making/realizing profits. But the problem is when the investment actually grows, many investors are tempted to wait for some more time to make more profit. Ultimately when market crashes, not only the profits get washed off, but the capital invested also gets eroded.

And this is very true in the case of Share Initial Public offering. Investors que up for investing in 'popular' issues. Due to popularity, the issue gets too good a response and gets 'heavily' oversubscribed. Be it FACEBOOK IPO (in USA which was prices @ $38 in IPO and currently languising @ $20), or Reliance Power or the example listed below, on listing all those investors who didnot get allotment in the IPO scramble and buy these shares 'at any cost'. No doubt - on Day ONE everything looks good and these investors are very proud and happy about their investments. After this initial Euphoria, the general public, media and the concerned investors lose track and this whole issue is forgotten. What is the natural fate of all these fancy IPO's - Here is an illustration:

One such issue which caught investors frenzy has been Varun Industries, which is into trading and export of Stainless Steel Utensils. Here are fact files:

• IPO came in October 2007 for 54 Crores.
• Issue price was Rs.60 Per share ( Rs.10 FV + Premium)
• Issue got oversubscribed 36 times.
• On listing in November 2007, Varun touched Rs.118 per share ( 97.5% listing premium over allotment price). Rather than selling their existing holdings and realizing the profits, investors kept buying this stock expecting the stock to go up even further - and it did.
• Hits all time high of Rs.276 per share in Feb 2012. Investors knew they were right by staying invested. They held on to existing investments hoping that the dream run would continue.
• And by March 2012 results, Varun reported massive loss of Rs.158 Crores against profit of Rs.39 Crores last year.
• Since then share prices have crashed by 91% and the stock is now trading at Rs.23.
• Reason quoted for the massive loss has been : Exceptional loss of Rs.160 Cr due to discount provied to overseas customers due to extraneous circumstances and adverse global economic situations.
• Another reason for the fall in business has been : Sanctions Slapped on Iran - Varun's major export market.
• Export contributed 90% of total income. Logically Exporters would be at advantage due to higher dollar conversion. But that was not the case with Varun - probably their customers renegotiated the prices.
• Though company and investors may blame adverse market conditions for Varuns bad financial performance, in its IPO Rating Crisil had assigned 1/5 which is lowest in safety.
• Other notable fact is that since March 2012, four independent directors had resigned from the board. Incidentally, Crisil had sighted "limited management sight by independent directors as one of the key concerns."
• In May 2012, Varun has been referred to Corporate Debt Restructuring Cell.
• 11 banks have an aggregate debt exposure of Rs.1632 Crores - of which Rs.1563 Crores is towards working capital loan.
• Though Varun is today available at 70% discount to its book value, it is definitely not worth investing in the stock for simple reason of having corrected (91%) significantly.

Moral of this Recent Real Life Incident:

• Give Importance to Credit Rating during IPO
• Do not chase crazy issues - which get quoted at sky high price, without any fundamentals.
• Do not invest in a stock just because it has fallen significantly. Check the reasons behind the fall.
• Invest in businesses which are sustainable. Limit your investments to 10-15 stocks.
• Above all, have a profit figure in mind - at the time of investment. And keep booking profit as and when the profit figure is reached. At the end, a bird in hand is better than two in the air.