The IPO (Initial Public Offer) boom which began when the markets recovered from its low in March last year had been witnessing a strong retail (individual) investors participation since then. In 2020 there had been nearly 14 IPOs collectively raising little over Rs 16,500 crore, as per data available publicly. Six months in 2021, there are over 20 IPOs and many more are to hit the markets including LIC, Shriram Properties, Aditya Birla Sun Life AMC and Zomato. Though most of the IPOs that had been listed so far, over 40-50 per cent listing day gains, not all the offerings are worth the investment.
To understand whether an IPO is a good long-term bet, going through the prospectus of the company will give you a fair idea. While not many have the time to go through the prospectus, having the following three points in mind (while investing) may help an individual investors.
Valuation and fundamentals
Of the IPOs that have come to the market, many, according market experts, are expensive. Meaning, the company is valued highly for the price investors pay or invest. For instance, for the price band of Rs 1,488-1,490, Indigo Paints was valued at a rich 140 times its FY20 earnings. Though the stock had gained nearly 20 per cent on the day of listing, it is now down about 5 per cent since then. But the company is fundamentally strong with negligible debt and likely to have good growth potential once the uncertainties due to Covid-19 clears out.
You as an investor should not only mind the valuation of the IPOs you want to invest but also its fundamentals – revenue, profit, margins, debt and capacity to grow in the future.
But on the other hand, consider Macrotech Developers (Lodha) for instance. The company was valued at around 26 times its FY20 earnings, at a modest discount to its Mumbai-based peers including Oberoi Realty (30 times FY20 earnings). But its financials were weak. For the nine-months ended December 2020, the company’s revenue fell 66 per cent to Rs 3,161 crore when compared to the same period last year. During the same period, the company registered a loss of Rs 264 crore vs profit last year. While this had been the trend with other listed realty players including Oberoi Realty and Godrej Properties, the decline had not been that steep.
Another company, Parag Milk Foods, that it the market in 2016, had fallen nearly 31 per cent since listing, mainly due to weak financials.
Following marquee investors
Many individual investors tend to go with what institutional investors are buying. This is true for IPO stocks as well. While you can consider following the footsteps of these institutional investors, you have to time the exit along with them for safeguarding your hard-earned money. Let’s consider an example. In the case of Burger King IPO in December 2020, investors’ categories like the QIB subscribed nearly 35 times and the retail investors subscribed 60 times. A few of the institutional investors have trimmed their shareholding by around 2 per cent between December and March (from 23 per cent to 21 per cent). But individual investors holding increased from 1.99 per cent to 2.13 per cent during the same period.
Other aspects: regulatory and legal issues
If you are unable to go through the entire prospectus of the company, it is important to understand the risks, regulatory and legal issues of the company. The same will be mentioned in the prospectus under separate sections. For instance, bank and NBFC IPOs often come under regulatory scrutiny of RBI for issues such as corrective measures and other orders. So for instance, Bandhan Bank which hit the market 2018, though had strong listing gains of nearly 30 per cent, the stock had been under pressure. This is on the back of RBI’s mandate on promoter dilution.
Authored by a good friend – BKS
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