Surfing the IPO wave? Wear a life vest

Make sure to check promoter background, IPO goals, company finances & valuation

NEW DELHI: After a temporary break caused by the second Covid-19 wave, initial public offerings (IPO) are back—and this time they are getting much bigger. An IPO is a process through which privately owned companies raise funds by selling shares to the public by listing on the stock markets. In the last week alone, four entities have issued IPOs to raise a cumulative `9,132 crore, and all of them were oversubscribed. Shyam Metalics and Energy was subscribed by 121 times and Dodla Dairy by 46 times.

The buzz in market circles is that around three dozen private firms are expected to go public this financial year FY22, up from 29 in FY21. This FY may also see big ticket listings from firms such as Zomato, Paytm, PolicyBazaar, and Pharmeasy, and a mega IPO from the country’s largest insurer—Life Insurance Corporation.

So, why’s there a rush? Experts say that the record rise in the number of retail investors (over 1 crore demat accounts were opened in one year) and the current bull run of the equity market has made a perfect setting. India’s equity market (Sensex) rose over 100 per cent from its March 23, 2020 levels to over 52,800 last week.

As for investors, returns for IPOs have been largely positive. According to RBI’s Annual Report, the financial year 2020-21 has turned out to be extraordinary for IPOs with 21 out of the 29 generating positive returns for investors on listing.

Siddharth Khemka, Head of Retail Research, Motilal Oswal Group, said that with rising interest in midcaps and smallcaps, investors were on the look-out for new ideas to invest in and these IPOs provided them the opportunity. In addition, with interest rates being very low, and the grey market premium running high, IPOs also provided a lucrative opportunity for retail investors to participate, he added. But if you are planning to try your luck in making money from the buzz created around new listings, you should keep in mind the following points:

Evaluating associated Risk
Investing in IPOs doesn’t mean a guaranteed return. It comes with its own sets of risk and, at times, investors have incurred huge losses. Some IPOs are also overhyped by corporates and, in most cases, it is difficult to get hold of a private company’s documents and balance sheet.

“One must understand the business model of the company and evaluate what moat the company enjoys. Companies present in an already crowded space are not getting a lot, unless and until it has a specific moat,” Khemka says.

The factors that you should be looking at while evaluating IPOs are industry prospects, promoter background, objective of the IPO, financials, valuation and threats faced by the company. Don’t fall for only the buzz around an IPO, and end up investing in an over-priced issue.

As for approaching big ticket IPOs of tech firms that have never reported a profit, Gaurav Garg, Head of Research, CapitalVia Global Research, says, “It is very important to evaluate whether the losses are increasing in proportion to the revenue or whether revenue is outpacing the losses.

Also, whether the companies enjoy dominance to the extent that they will be able to tactfully monetize in a way that they become profitable and demand remains inelastic.” It has to be noted that e-commerce giant Amazon had reported continuous loss-making years before turning profitable. However, we have also seen giants like Uber and Lyft eroding shareholder value after going public.

Stay long term or exit early?
One big decision that investors have to make while investing in IPOs is when to exit. Khemka says that retail investors are always lured by the prospects of making quick money from the equity markets, but wealth in equity markets is made only in the long term. “We have seen in the past that despite strong listing gains (more than 100% premium to IPO price), stocks have done well over the following year if they have strong fundamentals and good business models,” he said.

Yash Gupta, Equity Research Associate at Angel Broking says: “If we look at recent IPOs like Indigo Paints and MTAR Technologies, they have given listing gains of 90-100 per cent and, on the other hand, IPOs like Easy Trip Planner and Nureca have delivered more than 100 per cent returns for the long-term investors.” He also expects that IPOs will remain a significant wealth creator for short term as well as long term retail investors.

Short term traders can book the listing gains depending on how the IPO opens, while long term investors can hold on if the outlook for the company is good. People should frame their exit strategy depending on risk appetite and investment horizon, advises Khemka.

PErformance of Recent IPOs

Soma Comstar