IOT Infrastucture & Energy Services Ltd (IOT) has filed its draft red herring prospectus (DRHP) with SEBI for the IPO in Sept, 2010 and is testing market conditions to launch the IPO.
There is a big mental heuristic in India that investors can make good money by investing in IPOs or atleast make money on listing. But seasoned observers ask why we don’t have IPOs in a bear market! Investment Bankers and Promoters want the best price for giving out equity to the investors and that does not happen in a depressed market.
Apart from being aware of our psychological impressions about an IPO, we also need to understand the economics of the IPO. We need to understand why the promoters are coming out with the IPO.
Why IOT is coming with an IPO?
The object of the fresh issue is funding Rs 245 crore for building the Paradip Refinery Storage Terminal and Rs 342 crore for the Raipur Common User Terminal. The estimated cost of the Paradip terminal is approx. Rs 3000 crore and IOT has already invested Rs 78 crore into it. In other words, only 10% of the cost is being utilized from the IPO.
The promoters of this company are not individuals but they are big names. IOT Infrastructure & Energy Services Ltd. (IOT) is a joint venture between Indian Oil Corporation Limited, India’s largest petroleum refining and marketing company by sales and the highest ranking Indian company in the Global Fortune 500, and Oiltanking GmbH, the second largest independent tank storage provider for petroleum products, chemicals and gases world-wide. So, I don’t think the object of the IPO is to maximize profits for themselves.
IOT Infrastructure President (Finance) Jatin Mavani never appeared to be pushy about the IPO and was confident of their valuations. He said that IOT is not going to offer discounts in order to lure investors.
For any IPO or in any equity investment, I believe that strong company fundamentals and management team should be the main reason. Investing in an IPO’s requires the investor to understand the fundamentals of the company, fair valuations, future growth prospects all of which are beyond the understanding of a common investor.
As a general principle I stay away from IPOs. I first look at the time frame of the company’s existence as well as their understanding of the industry they are in.
IOT has been in existence since more than a decade and have deep understanding of the oil and energy business. Even though they started out as a venture to create Terminals for storage/receipt/despatch, they have branched out to Engineering, Procurement and Construction services (EPC) which is now generating the bulk of their revenue. They are also getting into other related businesses like the Upstream & Renewable Energy industry. More details on their site
To me, the impressive thing about IOT is encompassed in their tag line, “Glocally Entrepreneurial”. They have not been complacent about their rich parentage and have built/grown their business without favours from their parents. Mr Mavani said that they compete for projects from IOC and win on merit alone.
To conclude, I need to challenge my own mental heuristics/assumptions about an IPO (to stay away) and take a detailed look at their valuations. And perhaps invest, when IOT decides to launch their IPO.
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