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.
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.