The last few months have been extremely busy for several companies launching their initial public offerings (IPOs) and so has it been for the investors. The last few months have witnessed a sharp rise in the primary market activity because of the high liquidity in the economy that was led by benchmark indices trading at record levels and equity gains over the last year. 28 companies have already closed their initial public offerings (IPO) by raising more than 42,000 crores over the last seven months.
34 other companies have filed their offer papers with the market regulator SEBI for its approval. It doesn’t end here, more than 50 companies have expressed their plan to list their companies by the end of this year. These companies include names from both new-age technology-based firms such as PhonePe, PolicyBazaar, Flipkart Internet, Delhivery, Grofers, Mobiwik et cetera and traditional businesses as well.
In India, IPOs are observing excellent responses from investors through huge subscription and powerful effective listing gains. Also, several new investors have been opening Demat accounts, investing in the secondary market, and filing petitions for the IPOs. Although this may be the first big IPO rush for several young and new investors, experts recommend against getting diverted.
Why is all the market talking about IPOs?
IPOs are an easy way of earning quick money and undoubtedly every one likes easy money. The latest company to get listed was Tatva Chintan Pharma. Reportedly, the company took less than two weeks to more than double the investors’ money. On July 16, the company opened for subscription and got listed on July 29. It ended the day with a gain of 112 per cent over the issue price. Let’s take the case of Zomato, the company nearly doubled the investors’ investment in less than 10 days. The company opened for subscription on July 14 and got listed on July 23.
This year the stock market observed 26 companies that newly got listed. Out of those 26 companies only three of them are trading below their offer price. Six are trading with profits of over 100 per cent, and 12 with gains between 40 to 100 per cent.
The almost certainty of the high profit by IPOs this year is drawing more investors. This certainty has been confirmed by several companies in the secondary markets that have successfully generated high profits over the last year.
Taking a look at the investor rush
In January 2020, the total number of investor accounts with the Central Depository Services Limited (CDSL) reached 2.01 crore. The last 17 months have almost doubled the number to 3.96 crore accounts by June 30 2021. According to reports, over the last six months since December, CSDL has observed the addition of 1.07 crore accounts.
While India has recorded a huge addition of new equity investors, it also points that a considerable number of these fresh investors are opening accounts to gain from the rise in the secondary market and simultaneously participate in IPOs.
What factors should investors keep in mind before investing?
According to financial advisers, it is vital that investors build a diversified portfolio that has a larger component of growth-aimed blue-chip firms along with medium-sized and small firms with stable fundamentals.
Several are of the feeling that good-quality IPOs can be part of the overall holdings, and this investment should not be solely for listing profits but also for the value they can contribute in the medium to long term. It is vital to remember that while a considerable number of retail investors might not get shares granted during the IPO process of a reputed company because of enormous oversubscription, they will get a chance to enter the company after its listing.
Traditional vs startup
When an investor is planning to invest in a traditional business, the person can consider investing at an already listed company within the sector and compare with similar firms. However, when it is a fresh company (especially start-ups) planning to get listed, there no equal comparisons are available, and the entire investment dynamics are separate. Although these new-age companies could be making losses now, the investors bet on its future prosperity and profitability.
For these new-age companies, determinants such as growth in business, revenue, market capitalization and profits will be gradually known in the near future and will mainly depend upon technology divisions. Investors are required to make a thorough assessment before they accept a 5 to 10-year call on any of these fresh companies.
Several experts advise that apart from solely considering the market share, business expansion and revenue growth potential, which are no doubt the key determinants, investors must also consider the barriers. Sometimes, the barriers are considerably high for newer players in their domain of business.
Some consider these fresh companies that are financed by venture capital, private equity investors and other big investors do not have significant concerns on issues associated with promoters or corporate governance.
According to Pranav Haldea, MD, Prime Database, “The best part is that these are good companies as they are financed by PE investors for other large investors, and there is not much to worry about the governance aspect.”
Market shareholders assume that for new-age, technology-aimed businesses, investors must evaluate them completely before investing their money. They must scrutinize the viability of the business model and also if a considerable number of enduring investors are making an exit.
According to Prime Database, tech firms or startups have to be viewed from the broader perspective of how extensive their business occasion is. And also understand if the entry barrier is not too flat for a new investor.
Ask professional advice
Most of the IPOs this year have yielded big profits for investors. But, experts remind that primary market activity only drives on the buoyancy in the secondary market. So, if the secondary market becomes negative for some purpose, the primary market activity may simultaneously slow down. Even the listing profits may experience a change due to the decline in the broader criteria. Hence, investors must be extremely careful while investing. If the company reaching for IPO is charging a more expensive valuation, investors should wait.
Mrinal Singh, CEO and CIO of InCred Asset Management, said, “IPOs are money-constructing tools and firms panel their public issue when the liquidity in the market is leading. Bundling up IPOs when the liquidity is more leads to raised price discovery, and historical evidence shows that only 50 per cent of the firms are able to perform upon the expectations that get gathered from them.” He recommends retail investors be cautious while investing in attractive IPOs and one should judge his decision before investing any money.
He further said that retail investors should stringently avoid taking loans for the sake of investing in equity markets, and must ask for professional advice. According to him, just because access to the market has no barrier, this doesn’t imply that one should refrain from taking advice.
Another CEO of a leading brokerage firm said that in most of the events, the pricing is such that there is not much remaining for retail investors. He says that since liquidity in the market and demand are leading, the stocks are seen rising on listing. However, when the circumstances reverse, some of them may even witness the disappearance of the listing gains.
Therefore, investors must also look at the interest shown by adequate institutional buyers in an IPO, as that provides an idea of the status of the issue and its pricing.
Edited by Aishwarya Ingle
