Going public is a big event in the history of any company. Listing helps companies raise money from the public, diversify their shareholding structureandenhance their reputation.
Initial Public Offerings (IPOs) often create a lot of furore amongst investors as well. It’s quite routine for savvy investors to track the IPO watch segment in newspapers and keep an eye on the upcoming IPOs.
After all, investing inan IPOcan help you participate in the company’s future growth. If you invested in the IPO of Infosys or HDFC Bank and stayed put, youcould have raked in a lot of moolah by now.
But investing in IPOs can also give you an opportunity to make quick listing gains.
Unfortunately, many new-age investors focus a lot on making quick bucks on listing, completely ignoring the perils associated with it.
Whenever stock markets are doing well and investors are willing to take risks, quite a few new companies try their luck in equity markets, just as investors do.
Not all of them necessarily have long-term vision or even a well-thought-out path to profitability. Some of them might have promising prospects but they might offer their shares at a hefty premium as compared to the current worth of their business.
Before you check IPOs listed today, or track the IPO allotment status you may want to ask yourself a more fundamental question: Do I need to apply to every IPO?
You see, you need not dance every time the DJ plays music.
IPO investors of Paytm, CarTrade and Fino Payments Bank, amongst others, are still incurring losses.
Without any exaggeration, many a time investors don’t bother to check the fundamentals of a company going public. For instance, the multi-year stock market boom of 2003-08 was marked by the stupendous performance of infrastructure companies. Riding on the success of this theme any company suffixed ‘power’ could attract a lot of fanfare for its IPO even if it didn’t have any established track record of running such a business.
Companies that came to the market towards the end of the cycle and demanded sky-high premiums for their IPO, left investors in the lurch, at the time oflisting and even thereafter.
The Grey market premium gives prospective investors an estimated price the unofficial market (grey market) expects an IPO to list. For instance, if the offer price of an IPO is Rs 200 and its grey market premium is Rs 40, the company is expected to list at Rs 240, i.e. at a 20% premium. Mind you, this isn’t a static price and multiple factors such as market conditions and the IPO subscription data, amongst others, affect it continuously.
If you invest in IPOs, remember these 3 factors
Knowing the purpose of a company’s listing is important. Sometimes, the existing investors may either dilute their stake through IPO process or may even completely offload their holdings. When this happens, it’s called an Offer for Sale (OFS). Sometimes only a part of the issue is an OFS but it’s possible that the company isn’t issuing any fresh equity and the entire issue is OFS.
You should be careful about IPO pricing in such cases. In recent times, aggressively priced OFS have done poorly, post listing.
If the company is issuing fresh equity and collecting money, you may want to know what it intends to do with it. Does it plan to expand capacities, repay debt, make long term working capital provisions or create a buffer for acquiring other companies?
Be wary of companies intending to make unproductive use of IPO proceeds or not offering adequate clarity on the potential use of IPO proceeds. If you read phrases such as “themoney will be utilized forgeneral corporate activities/purpose”without proper explanation, tread cautiously.
For example: The on-going IPO for Syrma SGS Technology Limited is a combination of fresh issuance and OFS. The company intends to utilize IPO proceeds to fund the development of its Research and Development facility and the expansion of manufacturing facilities. The secondary and tertiary objectives include financing long term working capital requirements and general corporate purposes, respectively.
It’s a technology-focused engineering and design company operating in the sunrise sector of Electronics Manufacturing Services (EMS).
If the company belongs to a sunrise sector and is run by an experienced management, it might capitalize on growth opportunities over the long term. In such cases, carefully evaluate the company financials along with its growth rate in the last few years as well as any competitive advantages it may have. Usually, high growth companies having robust financials attract long-term investors.
For instance, Paras Defence & Space Technologies (one of the stocks assigned a subscribe rating by Ventura’s research team) which has a niche product portfolio and is expected to be one of the major beneficiaries of domestic manufacturing of defence equipment, went public in September 2021 at a price of IPO price of Rs 175/shareAs of August 09, 2022 the stock traded at Rs 650.
This is the trickiest part, especially if you are new to stock market investing. When companies going public prefer to price their IPO moderately and leave some gains on the table(for investors), such issues become popular with investors.
As a rule of thumb, compare the growth rate and valuations of the company with that of the industry leader in the listed space to gauge the attractiveness of the IPO. Here too, commentary by trusted industry research team &valuations might help.
Investing in IPOs can be rewarding in the short term as well as long term but the success of your IPO investment primarily depends on your selection. Hence, always make an informed choice.
Not sure where to start? Here’s an idea
Research notes on upcoming IPOs can be a great source of information and insights for serious investors. You can read our latest coverage on Syrma SGS Technology Limited before applying for the IPO via the Ventura Wealth Mobile App, Ventura Pointer or even your existing trading account.
The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made there from shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.