Depressed for not making money through initial public offerings (IPOs) when all the major indices and stocks in the secondary market are moving up to dizzying heights?

Well, this could be the feeling of investors who subscribed to the 18 IPOs that hit the markets during the current financial year, and are now trading at a discount to their issues prices. As many as seven IPOs flip-flopped on the day of listing, and the other 11 lost ground in the course of time.

Overall, the investors in the 18 public offers lost money - anywhere between 2% at the lower level and almost 50% at the higher level. The subscribers of big, premium issues like Jagran Prakashan [Get Quote], GVK Power & Infrastructure, H T Media, Gitanjali Gems [Get Quote] and Bannari Amman Spinning Mills [Get Quote] have lost between 8-25% each.

So, why did these IPOs flop on the bourses when the secondary market has been logging gains every day? A close look will reveal that these IPOs were priced at very high price to earnings (P/Es) ratios - at least on the basis of their earnings in the financial year 2004-05.

When the secondary market is currently trading at a P/E of around 17 times to their trailing twelve months earnings (December 2005), 12 out of the 18 IPOs were issued at a P/E of over 20 times. The other eight, too, got higher premium to their peers in the secondary markets - at least on the basis of P/E.

Sree Sakthi Paper Mills [Get Quote] eroded investors' wealth by almost 50% as the stock is currently traded at Rs 15.40 when compared with its issue price of Rs 30. The track record of the company prior to the public issue was none too impressive. It earned a net profit of Rs 1.09 crore (Rs 10.9 million) in 2004-05, and an earnings per share (EPS) of Rs 0.66 on the expanded equity base of Rs 16.44 crore (Rs 164.4 million). Which means the stock was offered in the IPO at a P/E of 45.25!

Gitanjali Gems, which was listed last week, flopped on Day 1. As against the issue price of Rs 195, Gitanjali closed at Rs 167.15 on the day of listing and is currently trading at Rs 151.50.

The company had earned a net profit of Rs 8.76 crore (Rs 87.6 million) in 2004-05, which gives an EPS of Rs 1.48 on the expanded equity of Rs 59 crore (Rs 590 million). Which means that IPO price of Rs 195 was at a P/E of over 131!!! Overpriced, did anyone say?

The bottomline: Look CAREFULLY at the fundamentals before investing in high priced IPOs.

Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group.