IPO IN­VESTORS BEST FRIEND

IPOS are at­trac­tive short term in­vest­ment op­tion and rel­ished by very many. Yo­gesh Su­pekar & Karan Bho­jwani bring forth the 'must do' list be­fore in­vest­ing in IPOS.

Dalal Street Investment Journal - - COVER STORY -

When it comes to in­vest­ing in eq­ui­ties, three ma­jor trends have been dis­cerned among re­tail in­vestors for the last cou­ple of years, viz., mu­tual fund in­vest­ing, IPO in­vest­ing and small cap in­vest­ing.

In­deed, in­vestors have shown pref­er­ence to­wards tak­ing ex­po­sure in eq­ui­ties via the mu­tual fund route as is re­flected in the grow­ing num­ber of re­tail fo­lios of mu­tual funds. How­ever, IPOS are the talk of the town for the in­vestors in 2017 as the cur­rent year prom­ises to be one of the best years for IPOS in over a decade.

The ta­ble be­low high­lights the im­pres­sive per­for­mance of IPOS (list­ing gains) in 2017 so far (27.06 per cent). In fact, if we con­sider the list­ing gains, only in 2007 and 2014 have we seen re­turns that were bet­ter than in the cur­rent year. Also, an in­ter­est­ing as­pect to note in 2017 is that the is­sue size of the IPOS have gone up con­sid­er­ably. The av­er­age is­sue size in CY17 so far stands higher by nearly 36 per cent when we con­sider the av­er­age is­sue size of ap­prox­i­mately 612 crore per is­sue for the pre­vi­ous five years. How­ever the av­er­age is­sue size in CY16 was higher at 1014.33 crore per is­sue, when com­pared to the av­er­age is­sue size of

836.86 crore for CY17.

This high­lights the ap­petite for qual­ity is­sues hit­ting the mar­kets in cur­rent year. Says Arindam Chanda, Head, Broking, IIFL, “I would def­i­nitely say there is a huge in­ter­est from re­tail, high net worth and in­sti­tu­tional in­vestors for qual­ity pa­pers in the pri­mary mar­ket. The in­vestors' ap­petite has been con­sis­tently strong for at least the last one year now. Just like stock pick­ing, we see in­vestors tak­ing keen in­ter­est in each IPO of­fer­ing and seek ad­vice and re­search on the

same. Also, a new pre­ferred route has emerged for in­vestors to ben­e­fit from the eu­phoric pri­mary mar­ket – the pre-ipo funds. We have a group of­fer­ing – the IIFL Spe­cial Op­por­tu­ni­ties Fund, which has suc­cess­fully raised over 5,000 crore and is still go­ing strong”. While there is no doubt on the pre­vail­ing op­ti­mism in both the pri­mary and sec­ondary mar­kets, there are cer­tain as­pects that any in­vestor look­ing for op­por­tu­ni­ties in pri­mary mar­ket should fo­cus on.

“Must do list” be­fore in­vest­ing in IPOS :-

There are two ways to an­a­lyse a stock and make buy­ing or sell­ing de­ci­sion – fun­da­men­tal anal­y­sis and tech­ni­cal anal­y­sis. It be­comes dif­fi­cult to ap­ply both th­ese meth­ods ef­fi­ciently when it comes to se­lect­ing IPOS for in­vest­ment. In­vestors must fol­low fol­low­ing best prac­tices when it comes to IPO in­vest­ing :-

Read 'Red Her­ring Prospec­tus' care­fully as it is the most com­pre­hen­sive doc­u­ment where an IPO in­vestor can get the most rel­e­vant in­for­ma­tion. Very few in­vestors go through the red her­ring prospec­tus.

In­vestors need to pay spe­cial at­ten­tion to the man­age­ment team and its ac­tual in­ten­tion be­hind rais­ing money and how does the man­age­ment plan to utilise the money gar­nered via IPO.

On sev­eral oc­ca­sions, the com­pany that is get­ting listed does not have peer com­pa­nies listed on the bourses and that makes it dif­fi­cult for in­vestors to eval­u­ate the IPO stock. In such a case, in­vestors can scan for glob­ally listed com­pany that matches the busi­ness pro­file of the new com­pany get­ting listed in In­dia. One can look at the val­u­a­tions at which th­ese global com­pa­nies are trad­ing and do a com­par­a­tive anal­y­sis.

It may miss sev­eral in­vestors' at­ten­tion, but it could be use­ful to ob­serve who is un­der­writ­ing the is­sue (IPO). Big­ger bro­ker­ages usu­ally have bet­ter net­work and are in bet­ter po­si­tion to run the IPO suc­cess­fully. Big­ger banks and bro­ker­ages will nor­mally en­sure that the new shares are placed with best pos­si­ble in­vestors.

The pro­mo­tion of the IPO is key at times to the suc­cess of the IPO. In­vestors should be able to distin­guish be­tween a qual­ity un­der­writer and an

un­der­writer who has no proven track record. In­vestors should be ex­tra cau­tious when any small in­vest­ment bank with no track record is in­volved.

Even though an IPO may hap­pen only once in the life­time of a com­pany, in­vestors need to un­der­stand that not all IPOS are 'once in a life time' buy­ing op­por­tu­ni­ties. The same com­pany may come up with a fol­low-on pub­lic of­fer (FPO).

Not all IPOS are money-mak­ing in­vest­ments and in­vestors should not fall prey to the in­vest­ment banker's ag­gres­sive sales pitch as th­ese banks are in­ter­ested in sell­ing the shares to the pub­lic.

Mul­ti­ple checks and scans are of para­mount im­por­tance be­fore one de­cides to park money in an IPO.

Use all the trust­wor­thy sources pos­si­ble like DSIJ in the pub­lic do­main to un­der­stand the sub­scrip­tion data for the IPO and make in­formed buy­ing de­ci­sion. Usu­ally, the sub­scrip­tion data will pro­vide in­sight into the de­mand for the new is­sue. Know­ing the de­mand for the is­sue makes the pre­dic­tion of prof­itable list­ing easy.

Have a clear strat­egy in mind be­fore in­vest­ing in IPO. Your strat­egy should be able to an­swer the fol­low­ing :-

Am I go­ing to use a flip­ping strat­egy or do I want to hold on to the shares for the long term? Flip­ping is a strat­egy, ba­si­cally a short term strat­egy, where the in­vestor sim­ply sells the shares on the list­ing day.

Hav­ing a clear IPO in­vest­ment strat­egy of­ten helps in­vestor to fo­cus ob­jec­tively on the in­vest­ments.

In case you are short of funds for in­vest­ing in a lu­cra­tive IPO , look for IPO fund­ing op­tions and check if it can be prof­itable af­ter un­der­stand­ing the pros and cons of the IPO fund­ing.

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