Most Initial Public Offerings these days are done through the book-building

method.
Book building is the process of price discovery. The company does not come out
with a fixed price for each share. It fixes it through the book building process.
In such cases, what the company comes out with a price band. The lowest price is
referred to as the floor and the highest, the cap.
These figures are not arrived at randomnly; they depends on parameters such as the
net worth of the company, its earnings per share, the prospects of the business and
the market conditions.
Taking these factors into consideration, the issuing company, in consultation with
its merchant bankers to the issue, first fixes a price band. This price band is
indicated on the prospectus (a document that contains all the details of the issue).
Investors are then invited the bid for the shares. They state their price and the
number of shares they would like at that price. Accordingly, the right price is
'discovered'.
Missed investing in an IPO?
Here's how it works
Three classes of investors can bid for shares:
1. Qualified Institutional Buyers: They buy 50% of the issue. Out of this 50%, upto
5% has to be allocated to mutual funds.
2. Retail investors: 35% of the issue

3. High networth individuals and employees of the company: 15% of the issue
The book running manager or chief merchant banker, on receipt of the offers,
maintains a record of the names, the number of shares ordered and the price of the
bids.
After the bidding is over, the issue price is fixed based on the bids received. This is
called cut-off price.
All bidders who have quoted above the cut-off price are entitled for allotment.
Stock picking is about conviction
Working it out
Let's say a company is coming out with an IPO of 4,000 shares and the price band
is fixed at Rs 30 to Rs 36 per share.
The bidders can bid at any price within the price band. Seven bids have come in.
Bid
price
Number of
shares bid for
Percentage of
total shares
Cumulative
shares bid
Rs 36 1,000 25% 1,000
Rs 35 1,500 62.5% 2,500
Rs 34 500 75% 3,000
Rs 33 1,000 1000% 4,000
Rs 32 1,500 137.5% 5,500
Rs 31 2,000 187.5% 7,500
Rs 30 2,500 250% 10,000
The price discovery is a function of demand at various prices.
Let me explain.
The highest price at which the company able to issue the desired number of shares
is the price at which the issue is subscribed. In the above example, Rs 33 per share
(or lower) will be the cut-off price.
The reason? Including all the bidders up to Rs 33 per share will ensure the 4,000
shares will be sold.
If Rs 33 is the cut-off price, those who bid for less than Rs 33 will not be allocated
any shares. Those who bid at Rs 33 or more will get the shares at Rs 33 each.
Most companies leave the issue price below the highest cut-off point so there is
some scope for price appreciation for the investor. In the above example, if the cut-
off is fixed at Rs 30, the issue will be oversubscribed 2.5 times andproportional
allotment will have to be made.
This is all very transparent and you can see a graphical representation of the
consolidated demand and price on theBombay Stock Exchange and National Stock
Exchange Web sites. You will also see it at the bidding centres during the bidding/
issue period (these centres will be listed in the Prospectus).
5 tips on how to pick a stock
How to make it work for you
You can put in bids in the names of your family members too. You will,
however, need to open a demat account for them first.
Also, if the issue is being oversubscribed (you can find out on the stock exchange
websites mentioned above), increase the number of shares you want. For instance,
if you want 100 shares and feel the retail portion of the issue will be over-
subscribed three times, you should bid for 300 shares.
When the bookbuilding process starts, don't apply for an IPO on the first day itself
-- check how the demand builds up.
If the institutional interest is large and retail interest is muted, you stand a good
chance of getting an allotment.
Also, if the institutions don't get the shares they want, they will pick it up when the
stock gets listed. This unsatisfied institutional appetite will mean that the stock
price will go up after it is listed.





















What is the difference between Cut
off and bidding price in IPO?


ONLY Retail investors are allowed to bid at cut offprice , which is higher band
price . say for price band of 90 to 100 , cut off is 100/ . cut off application has an
understanding that what ver price is finalised , shall be applicable and balance will
be refunded.

even if you apply with bid price of 100/ and price decided 96 , you will be allotted
at 96 and balance refunded .

if you apply at lower bid of say 95 and price declared 96 your apply will be
rejected.

RETAIL INVESTOR SHOULD AVAIL THIS FACILITY AND APPLY ONLY
AT CUT OFF PRICE




















example of recent ipo- tree house
education and accessories ltd.


The initial public offer of Tree House Education and Accessories , an educational
services provider, has opened for subscription. Company offers 84,32,189 equity
shares though IPO and fixed price band at Rs 135-153 a share.
Company will offer discount of Rs 6 per equity share on the final issue price to
retail investors. Bids can be made for minimum of 40 equity shares and in
multiples of 40 shares thereafter.
The issue, which shall constitute 25.01% of the post issue capital, will close on
August 12. 2011.
Tree House operates the largest number of self-operated pre-schools in India.
(Source: CRISIL Report - December 2010). As of June 15, 2011, it has 223 pre-
schools under the brand name of Tree House across 33 cities (as per municipal
limits) in India; out of which 149 are operated by the company and the rest by
franchisees.
Company aims to raise around Rs 114-129 crore through the issue. It intends to
utilise that proceeds for expansion of pre-school business; acquisition of office
space; procurement of exclusivity rights to provide educational services;
construction of infrastructure for educational complexes in Rajasthan and Gujarat;
and repayment of loan.
JM Financial Consultants Pvt Ltd and Motilal Oswal Investment Advisors Pvt Ltd
are the book running lead managers to the issue. Link Intime India Pvt Ltd is the
registrar.







Example 2 l and t finance holdings
ltd.

Shares of L&T Finance Holdings settled below the issue price of Rs 52 on the
bourses on the first day of trade amid a sluggish broader market.
After a weak opening, the scrip failed to recover the lost ground and ended at Rs
49.95, down 3.94 per cent vis-avis the issue price on the BSE.
The stock had a similar fate on the NSE, where it closed at Rs 49.95, down 3.94
per cent against the issue price.
The company which raised Rs 1,245 crore through its initial public offer, plans to
use the proceeds from the issue in five L&T subsidiaries -- L&T Infrastructure
Company, L&T Finance, India Infrastructure Developers, L&T Investment
Management and L&T Mutual Fund Trustees.
The portion reserved for QIB bidders got subscribed 1.93 times, the segment for
non-institutional investors was subscribed 6.13 times and the one for retail
investors was subscribed 8.64 times.
According to market experts, there were some concern about the valuation of the
stock vis-a-vis its listed peers. Besides, the overall volatility in the markets also
affected the stock.
Meanwhile, the BSE benchmark index Sensex ended 219.77 points lower at
16,839.63.





Example 3- birla specific medspa
ltd.
Birla Pacific Medspa: Group IPO
record speaks itself!
the Birla Pacific Medspa IPO
The present IPO is a fresh Issue of Equity Shares of Rs 10 each
aggregating to Rs 65.175 crore. The offer is being made in the price
band of Rs10 Rs11 a piece. Thus, the issue quantum would be around
6.52 crore shares or 5.93 crore shares depending on the offer price which
translates into 58% or 56% of the companys post-IPO equity.
Issue Objective
The main objects of the
IPO are to fund the
capital expenditure
towards establishing 55
spa centers across the
country (Rs 49.50 crore),
brand promotion (Rs 6
crore) and working
capital for running the
spa centers (Rs 0.7
crore).
Parentage
The issuer Birla Pacific
Medspa Ltd (BPML)
was originally promoted
as an equal joint venture
between Yash Birla
Group company viz.
Birla Wellness &
OFFER AT A GLANCE
Name Birla Pacific Medspa Ltd
Offer
Quantity
5.93 to 6.52 Cr Shares of Rs
10 each
% on Total
Equity 56 to 58%
Offer
Amount Rs 65.18 cr.
Offer Price Rs 10 to 11
Bid
Quantity 500 & Multiples of 500
Bid/Offer
Opens June 20, 2011
Bid/Offer
Closes
June 23, 2011
Rated By Brickworks Ratings
Rating 2/5
Lead
Managers Arihant Capital
Registrars Adroit Corporate
Healthcare Private Ltd and the Singapore-listed Pacific Healthcare
Holdings Ltd (PHHL) along with Dr Abhijit Desai, a dermatologist who
is a shareholder-director of the Mumbai-based PacHealth Medical
Services Private Ltd (PMSPL) promoted by PHHL and Dr. Desai.
However, the joint venture agreement has been scraped subsequently
and BPMLs ownership pattern has undergone a major change.
Currently Birla Wellness controls 64.3% of the companys present
equity of Rs 46.97 cr. Pacific Healthcare (Singapore) and PMSPL
(Mumbai) hold 7.2% and 5.2% respectively as non-promoters. Media
giant Bennett, Coleman & Company has staked in 22.8%.
Business
The company operates medical wellness (med spa) centres under the
brand name `EVOLVE. A med spa is a hybrid between a medical clinic
and a day spa and operates under the supervision of a medical doctor.
Each med spa centre is designed to offer scientific makeover solutions
for enhancing ones beauty. Using the state-of-the-art equipments the
centre provides patient-centric solutions for safe treatment.
All consultations and procedures are carried out with utmost privacy and
in pleasant, comfortable and specially designed rooms. Thus the Evolve
Medspa is a one-stop centre offering latest in medical related beauty
treatments under cosmetic surgery, cosmetic dermatology and advanced
dentistry.
Growth Prospects
Even though the `Wellness space in India is still at a nascent stage as
compared to international markets, it is projected to grow impressively
in the next five years. The growth drivers of this industry are the
increasing consciousness of ones looks along with desire for quick-fix
solutions and growing influence of western lifestyle.
BPML currently has five self-owned med spa centres in Mumbai and
two franchisee-owned clinics at Thane and Chennai. The company now
proposes to set up additional 55 centres across Tier I and Tier II cities in
India. The prospects are no doubt good. But, will BPML deliver?
Disappointing Track
The existing business of the company was taken over from PMSL for a
consideration of Rs 4.10 cr in November 2008. Since then the company
has accumulated losses to the tune of Rs 11.53 cr till December 2010.
The companys present top line is abysmally low at Rs 1.65 cr for nine
months as against its existing equity base of about Rs 47 cr. Given the
current scenario, when and how BPML will service its huge post-issue
equity capital of more than Rs 110 cr is anybodys guess.
Concerns
Frightening track record of Yash Birla group IPOs three-fourths
(75%) of the investors money gone in the wind
Pathetic profitability of the group companies
Groups poor track record of project implementation
Two of the group companies already referred to BIFR
Project of Rs 65 cr has not been appraised by any external agency and
the deployment of the fund is entirely at the discretion of the
management
Present IPO graded as below average
Yash Birla Group IPO History
Between 2006 and 2010 the Yash Birla group floated as many as five
public issues whose present plight will certainly advise investors to keep
away from Birla Pacific Medspa. The groups flagship has inflicted a
capital loss of more than 87% and its most recent IPO is currently
languishing at 70% lower than the offer price.
COMPAN
Y
ISSU
E
DATE
F
V
IPO
PRIC
E
IPO
AMT
CURN
T
PRICE
CURN
T
VALU
E
GAIN/LOS
S
Rs (Rs) (Rs
Cr)
(Rs) (Rs
Cr)
(Rs
Cr)
%
Birla
Power
24-
Mar-
06
1 4.20 50.40 1.00
12.00
-
38.40
-
76.2
Zenith
Birla
16-
Oct-
06
10 55.00 131.0
0
7.07
16.84
-
114.1
6
-
87.1
Birla 27- 10 45.00 18.03 8.55 3.43 - -
Valuation
Though wellness industry may command a better discounting than the
market composite, in the absence of any credible financial track record
even a par value may prove very costly for the BPML IPO investors.

Machin Aug-
07
14.60 81.0
Birla
Cotsyn
30-
Jun-08
1 1.40 144.1
8
0.51
52.52
-
91.66
-
63.6
Birla
Shloka
11-
Jan-10
10 50.00 34.78 14.75
10.26
-
24.52
-
70.5
TOTAL
378.3
9 95.04
-
283.3
5
-
74.9
N.B.: Price adjusted to post-issue stock-
splits
(Source:I ndia Aarthik
Research)
DESCRIPTI
ON
M-CAP P/E P/B
V
P/F
V
P/R OP
M
YIEL
D
PRIC
E
(Rs Cr) (X) (X) (X) (X) % % (Rs)
Market
Composite
6,588,30
8
17.
1
2.6 32.1 1.7 22.9

Talwalkars
582 37.
5
4.5 24.1 6.7 41.6 0.2 241.1
5
Birla Pacific-
Hi Band 117 0 1.1 1.1
53.
4 0 0 11.00
Lo
Band 112 0 1.1 1.0
51.
3 0 0 10.00