Be cautious while investing in IPOs: Nilesh Shah

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Prudential ICICI in expansion mode What's hot, what's not with mutual funds? Mkts having a sense of comfort: Pru ICICI MF Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

In the last one month or so, mutual funds got a lot of money in. This has been the case across funds from companies like Franklin Templeton and DSP Merrill Lynch in particularly, and also UTI and now Prudential ICICI, which has come in with a new fund- the equity and derivatives fund.

Chief Investment Officer of Prudential ICICI, Nilesh Shah discusses the current situation of the market in terms of inflows, valuations and the general consensus on the market.

He also says that not all companies are coming up with attractive pricing in IPOs, and advises investors to be careful while investing in IPOs.

Excerpts from CNBC - TV18's exclusive interview with Nilesh Shah:

Q: First a quick word on what you are seeing in terms of flows into the industry. The existing funds didn't get too much money at all, but some of these new offerings are still mopping up money even as the retail mood remains quite cautious about valuations and levels. How do you explain that?

A: That's a real difficult thing to explain. The NFOs (New Fund Offer) do receive encouraging response from the investors, whereas the existing funds with a solid established track record in a running portfolio do not solicitate that kind of response.

Maybe there is some sort of disconnect between what we are proposing and what the investor wants to hear, and that is kind of creating a mismatch between the flows into the new funds vis-à-vis the existing funds.

Q: What is your sense of what the retail sentiment or HNI sentiment is right now? People we speak to seem to be fairly cautious about making fresh commitments at these levels.

A: Definitely. Most of the people we have met during the last couple of weeks are actually praying for a correction. One positive thing is that now no one wants to argue against the long-term potential of India.

So most people do believe that over 5-10 years, the equity markets and the Index will be far higher than what it is today. Now they just need to get that sentiment or mentality where you have to jump into the swimming pool to learn the swimming.

However, the comfort zone is still missing, where if you have a 10% correction in the market, it doesn't matter. That kind of mentality is still not coming in. So people want to get in when the market has corrected rather than when the going is still good.

Q: I believe that in the equity part of your fund, you are going to look at largecaps and IPOs. How have you read the recent performance for some these stocks that have listed?

A: Essentially, if we see the two distinct phases- before May and after May- most of the IPOs before May, atleast on the listing, were giving decent gains. Whereas most of the IPOs after May 2006 have not been giving those kind of return.

Somewhere, the pricing of the IPOs, atleast in a few cases, are looking far more expensive than the current stocks available. That's why you are seeing that kind of trend.

Now, the IPO market also need not provide any margin of safety and so one needs to be very careful while investing in IPOs. We are seeing a fair amount of pipeline emerging on the IPO side.

Not all the companies are coming with attractive pricing. There are many peer group companies available in the existing market at far lower valuation, so one needs to be careful while investing in IPOs.

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