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Thursday, September 16, 2021

Explained: What to make of IPO rush

In the last 7 months, 28 companies have completed IPOs, 34 have filed offer papers, and over 50 others are in line. While retail investors have made huge gains, experts advise caution before joining the rush.

Written by Sandeep Singh | New Delhi |
Updated: August 7, 2021 8:56:03 am
ipo, ipo rush, ipo rush 2021, ipo subscription status, ipo subscription, ipo latest news, ipo india newsIPOs are witnessing huge subscription and impressive listing gains (Source: Pixabay)

Equity gains over the last one year, benchmark indices trading at record levels and high liquidity in the economy have led to sharp rise in primary market activity over the last few months. While 28 companies have already concluded their initial public offerings (IPOs), raising over Rs 42,000 crore over the last seven months, 34 others have filed their offer documents with market regulator SEBI for approval. Besides, over 50 more have announced their intention to come with their IPOs this year; these include names from both traditional businesses and new-age technology based companies such as PhonePe, MobiKwik, Grofers, PolicyBazaar, Flipkart Internet, and Delhivery.

With IPOs witnessing huge subscription and impressive listing gains, a number of new investors have been opening demat accounts, investing in the secondary market, and filing applications for the IPOs. While this may be the first big IPO boom for a large number of young investors, experts advise caution against getting swayed.

Why is the market talking about IPOs?

Everyone likes quick money, and IPOs have delivered exactly that. Tatva Chintan Pharma, the latest to get listed, took less than two weeks to more than double investors’ money. After the issue opened for subscription on July 16, it got listed on Thursday and closed the day with a gain of 112% over the issue price. Similarly, Zomato nearly doubled investors’ money in less than 10 days, having opened for subscription on July 14 and got listed on July 23.

Of the 26 companies newly listed this calendar year, only three are trading below their offer price. Six are trading with gains of over 100%, and 12 with gains between 40–100%.

While several companies in the secondary markets have also generated high returns over the last one year, the near certainty of a high return by IPOs this year is attracting even more investors.

ipo, ipo rush, ipo rush 2021, ipo subscription status, ipo subscription, ipo latest news, ipo india news Source: Prime Database

How has the investor rush been?

In January 2020, the number of investor accounts with the Central Depository Services Limited (CDSL) stood at 2.01 crore; over the last 17 months, it nearly doubled to 3.96 crore accounts by June 30, 2021. In fact, over the last six months since December (2.89 crore accounts), CDSL has added 1.07 crore accounts.

So, while there has been a big addition of new equity investors in India, it also indicates that a large number of these new investors are opening accounts to benefit from the rise in the secondary market and also participate in IPOs.

What factors should investors consider?

Financial advisers say it is important that investors build a diversified portfolio that has a bigger component of growth oriented blue-chip companies along with mid-sized and small companies with strong fundamentals.

Many feel that good-quality IPOs can be part of the overall portfolio, and this investment should not be purely for listing gains but for the value they can offer in the medium to long terms. It is important to keep in mind that while a large number of retail investors may not get shares allotted during the IPO process of a good company because of huge oversubscription, they will get an opportunity to enter the company after its listing.

Traditional vs startup

When someone is planning to invest in a traditional business, he or she can look at an already listed company within the sector, and do a peer review. However, when it is a new-age company planning to get listed, there are no peer comparisons available in most cases, and the entire investment dynamics are different. Although these companies could be making losses at present, the bet is on its future growth and profitability.

For this new set of companies, factors such as growth in business, revenue, profits and market capitalisation will be eventually known in the future, and will depend upon technology disruptions. Investors need to make a careful assessment before they take a 5-10-year call on any of these companies. While market share, business, expansion and revenue growth potential is key, many experts say one must also see if the entry barriers are high for newer players in their area of business.

Some feel new-age companies that are backed by venture capital, private equity investors and other large investors do not have big concerns on issues related to promoter or corporate governance. “The good part is that these are good companies as they are backed by PE investors for other large investors, and there is not much to worry on the governance aspect,” said Pranav Haldea, MD, Prime Database.

Market participants say that for new-age, technology-oriented businesses, investors must assess them thoroughly before putting in their money. They must check the viability of the business model and also whether a large number of existing investors are making an exit.

“Tech companies or startups have to be seen from the larger perspective of how wide their business opportunity is and also see if the entry barrier is not too low for a new player,” said the research head of a leading brokerage firm.

Seek professional advice

Although most of the IPOs this year (till date) have generated big returns for investors, experts remind that primary market activity only rides on the buoyancy in the secondary market. So, if the secondary market turns negative for some reason, the primary market activity may also slow down, and even listing gains may witness a correction in line with the decline in the broader indices. Investors must take a very careful look at the pricing of the issue; if the company coming for IPO is demanding a higher valuation, investors may wait.

Mrinal Singh, CEO and CIO of InCred Asset Management, said, “IPOs are money-raising tools and companies line up with their public issue when the liquidity in the market is high. Bunching up IPOs when the liquidity is high leads to elevated price discovery, and historical trend shows that only 50% of the companies are able to deliver upon the expectations that get built-up from them. So, I would say that retail investors should be very cautious while investing in IPOs and valuation sanity is a key.”

He said retail investors should strictly avoid taking loans for investing in equity markets, and must seek professional advice. “Just because one has access to invest in market, it doesn’t mean you should not seek advice,” said Singh.

The CEO of a leading brokerage firm said that in most of the cases, the pricing is such that there is not much left for retail investors. “Since liquidity in the market and demand are high, the stocks are rising on listing. However, when the tide turns, some of them may even see vanishing of the listing gains.”

Investors must also look at the interest shown by qualified institutional buyers in an IPO, as that gives an idea of the quality of the issue and its pricing.

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