Checkpoints to Remember While Subscribing to an IPO

Retail investors are queuing up in millions to participate in the initial public offer frenzy that hit Dalal Street of late. 

Technological advancements have allowed them to subscribe to IPOs without leaving their homes, and thus the numbers. For example, some 3.2 million investors queued up for the Zomato IPO, one of the largest. 

A strong bull run in the Indian stock markets triggered the IPO rush.  Significant liquidity sloshing around and the listing gains of past IPOs are the critical reasons for the primary market doing well. 

Deepak Jasani, Head of Retail Research, HDFC Securities, says, "In these disruptive times, investors are hopeful that new players would be more capable of adapting to changing times compared to the already listed players."

The fact that there is little existing float available in these businesses, some of which may be in niche areas, also helped build the hype. 

"In addition, the grey market, which has become highly active, has also contributed to the boom," said Jasani.

According to Suresh Shukla, Joint President & Head of Broking and Customer Services at Kotak Securities, investors should look out for the following points:

1. Past records: Whether it is loss-making or its earnings are volatile.

2. Integrity of promoters: Check for qualification, experience and criminal record of promoters.

3. Price of the issue: Compare it to listed players in the industry with ratios like P/E. Check if the IPO is overpriced.

4. Objects of the issue: Check whether the IPO provides an exit route to an existing investor or for business purposes. It would be healthy if the IPO is for business and expansion.

5. Promoter Holding: Higher the better

6. Legal and Other information:  In the Red Herring Prospectus, you will find all unsettled lawsuits filed against the company or promoters. A company with critical lawsuits is not an attractive investment option.

7. Balance Sheet Quality: Look for debt on the balance sheet. Lower the debt/equity ratio better the IPO.

8. Quantitative and Qualitative Disclosures about Risks: Risk is a part of every business. Hence, the company lists down all the possible risks it could face post issue. It includes market risks, interest rate risk, foreign currency risk, credit risk and other economic changes. Check for these risks. Read this carefully.

9. Financial Ratios: Check for all key financial ratios.

10. Not to follow the herd and conduct your research before investing.

Jasani from HDFC Securities says one should also look at the industry's character in which it operates. In addition, other businesses of the promoters and their involvement also need to be critically considered.

Factors including uniqueness of the products and services sold, technology edge, company's leverage ratio, working capital efficiency, and timing of their intended benefit are important factors that cannot be overlooked. 

Promoters' compliance record, competition scenario, growth phases of the industry also play an essential role.

Zomato's listing, for example, may encourage other new-age technology companies that are waiting to come to the capital market. Such companies may now opt to list in India rather than choosing to list abroad. 

Currently, Indian investors seem to appreciate the magnitude of investments these companies are making and take a long-term view of their business. Therefore, they need to look at similar companies in developed and other developing nations for valuation and top it up with the Indian market potential. 

As long as valuations of tech-enabled companies remain buoyant globally, they may continue to attract buying, provided they can register growth in their key parameters irrespective of their quarter-to-quarter profitability or lack of it. This listing also signifies changing risk appetite by Indian investors and their evolution over time.

"We will be able to evaluate and subscribe to many new tech-based platforms over the next few months," said Jasani.

It is a reality of life that these businesses will gain importance in the future. Each of these IPOs has a different model, revenue kickers, target customer base, and competitive challenges. 

If market conditions remain good, they could be priced steeply (based on historical parameters), and get listed at a premium. Still, the real test will be when the markets do not remain as buoyant, and these companies face new challenges – expected or unexpected. 

Some of these may also be included in the frontline indices and may offer scope for lasting gains. However, all of them will not generate wealth. New technologies also mean that technology that lifts their fortunes will also bring them down when a competing technology takes a bigger pie of the market, or a more prominent player indulges in mergers and acquisitions, and the incumbent player faces serious challenges. 

One, therefore, will have to be selective and need some luck to bet on the right stocks to create enough wealth.

In the process, one will have to learn to value a stock through different lenses, such as price to sales (P/S) and enterprise value-to-sales (EV/sales). However, one needs to be aware of the need not to get carried away by these lenient valuation methods in undeserving companies.

Retail investors who have not seen cycles in the markets may be shocked following a crash.  On the other hand, periodic profit-taking may help, though one may not exit. 

According to Ashish Chaturmohta, Director Research, Sanctum Wealth Management, IPOs induce excitement among retail investors. It shows them an option to amass wealth or generate high returns on listing gains. 

This is true if we see companies like Dmart, which have provided consistent returns post listing. Therefore, one should focus on booking profits and ensuring that the capital remains protected in the current market scenario. Further, most importantly, FOMO — the fear of missing out, should be controlled.  

"The current scenario reminds me of a famous quote by John Maynard Keynes who says, 'the markets can remain irrational longer than you can remain solvent," says Chaturmohta.

Investors nowadays are entering the market to earn massive or mega returns. However, one shouldn't be greedy to make more or gain more than what they have achieved.  

However, it is best to consult experts before investing in the stock markets.

IPOs Expected in August 2021

Source: Angel Broking