How To Get It Right?

• Place bids with multiple demat accounts to ensure allotment in oversubscribed IPOs
• Apply during the initial days
• Go by fundamentals; don’t seek only listing gains
• Be patient; don’t look for returns within weeks or months
• Grey market premium is only an indicator; it doesn’t reflect the actual price
• RHPs and DRHPs are the best way to judge IPOs
• Check promoters’ background, growth patterns, and cash flow stability
• Avoid high-risk projects, and companies with not-so-good backgrounds

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Yesha Shah, a chartered accountant from Mumbai, has been burning the proverbial midnight oil, researching on companies scheduled to enter the equity market with Initial Public Offers (IPOs). Shah’s first IPO investment brought her a windfall and got her hooked into making some quick moolah. In fact, the 25-year-old has already reaped a 60 per cent return on investment from IPOs.

Her modus operandi is simple. Depending on her ability, she spends around Rs 15,000 to Rs 45,000 to apply for about one to three times the minimum number of shares. And she sells it off as soon as the IPO is listed at a higher price on the bourses. It is easy profit within a matter of a few days, beating the average long-term return (18-25 per cent) from equity. Shah boasts of making profits from IPOs launched by a clutch of companies, including Rossari Biotech and Mazagon Dock Shipbuilders.

Shah is among a growing community of people who are looking at IPOs as an alternate source of extra money.

Market indices have been on a relentless rise, and most large-cap stocks are beyond the reach of the majority of retail investors. An alternate option for them would thus be to invest in mid-cap stocks. However, not all mid-cap stocks have been faring well on the stock markets. Many are facing the wrath of the pandemic, leading either to their closure or a drastic deterioration in fundamentals. For a retail investor choosing the right mid-cap stock could be a daunting task, for not every investor has access to technical and fundamental analysis.

The one affordable option, therefore, would be to ride the IPO frenzy that has hit the market of late. These stocks are getting subscribed multiple times, and they are listing at remarkably high premiums on the bourses. For example, Happiest Minds Technologies, Mazagon Dock Shipbuilders and Chemcon Speciality Chemicals were subscribed 150.98 times,157.41 times and 149.3 times, respectively. Rossari Biotech was subscribed 80 times and zoomed 60 per cent on debut. Mindspace Business Parks REIT was subscribed 13 times and listed at an 11 per cent premium. The list is a long one, and many IPOs have fared well.

Lucrative returns in a short span are irresistible. In fact, IPOs of over five companies are expected to hit the market in the next few months, and savvy investors like Shah wouldn’t want to miss this opportunity. As an investor, if you have stayed away from IPOs, there is still time to jump on to the bandwagon. However, experts warn investors to conduct a thorough research on the stock before taking a call since, like the secondary market, the IPO market is also fraught with risks. “Investors usually get carried away by the grey market premiums and the fear of missing out. However, long-term investors should be sceptical before investing in an IPO, and conduct thorough research on the company,” says Arjun Yash Mahajan, Head Institutional Business at Reliance Securities. “Red Herring Prospectus (RHPs) is the best initial document to research as it carries most of the information required for an investment decision,” he says.

RHPs are big fat books prepared by companies planning for IPOs. These are submitted to Sebi, and contain details of the offer, allowing investors to undertake informed decisions.

Recent Developments

Between January and March this year, companies receiving regulatory approvals had to defer their IPOs following the onslaught of the Covid pandemic as under-performance hit them hard. Only eight IPOs were listed at the bourses. The primary markets—for new issues—remained subdued till June after the listing of SBI Cards in March 2020. Between April and June, the number dwindled to just two IPOs.

However, the trend magically flipped with a sudden flow of money into the secondary markets for shares already listed and trading. A fund rush turned the sagging market around, and the enthusiasm seeped into primary markets too, resulting in the revival.

Yesha Shah, 25 Chartered Accountant Mumbai Has reaped 60% return on IPO investments

In July, two companies, Rossari Biotech and Mindspace Business Parks REIT, braved the market and surprisingly met with runaway success. They managed to raise Rs 5,000 crore amid a rising demand from retail investors.

Following their footsteps, in September, two more companies—Happiest Minds Technologies and Route Mobile—encashed on a dramatic demand for their IPOs. Both benefited from the accelerated adoption of digital technologies globally. Other positives, such as expanding margins due to the depreciating rupee, cost controls, lower attrition, and a strong growth prospect, pushed up their stock prices. Sensing the enthusiasm, many companies lined up with offers and investors cashed in.

A ready reference for IPOs —the S&P BSE IPO performance tracker-2020 puts the total number of offers at 19 between July and November. In October, IPOs from Computer Age Management Services, UTI AMC, Angel Broking, Chemcon Speciality Chemicals, and Mazagon Dock Shipbuilder hit the market.

Grey Influence

Before listing on bourses, an illegal grey market trading often pumps up the listing price of these offers. It discovers the premium that investors are willing to pay. If premiums are high, more investors are likely to participate in the IPO. An active grey market and ample liquidity attract more applications than are necessary to raise the money through the offer.

“The recent IPOs were good ones after a long time. Retail investors participated heavily, attracted by a strong grey market premium that promised substantial listing gains,” says Hemang Jani, Head – Equity Strategy, Broking & Distribution, Motilal Oswal Financial Services.

The Menu

Experts foresee the momentum of fundraising via IPOs to continue. Companies, which have already filed Draft Red Herring Prospectus (DRHP) with Sebi, are expected to conclude their IPO listings during the current fiscal.

“A total of 20 companies have filed DRHP with Sebi, of which 15 are planning to raise over Rs 15,000 crore cumulatively, and have received approvals. Five of them, planning to raise a total Rs 5,000 crore, are awaiting approval,” informs Satyen Shah, Head – Investment Banking, Edelweiss Financial Services. Several IPOs, including Kalyan Jewellers, Lodha Developers, Burger King and RailTel, are in the pipeline. Life Insurance Corporation of India (LIC), likely to be the country’s largest IPO so far, may join later this fiscal. The Centre plans to raise between Rs 80,000 crore and Rs 90,000 crore, and savvy investors have much expectation from this offer.

Offer Structure

Today, the structure of an IPO is critical in making investment decisions. Business risk, valuations vis-a-vis peers, promoters’ credibility, and experiences are equally important. Well-known names in the pre-IPO shareholding also add credibility to its marketability.

These factors have to be studied intricately to understand how a company will perform after it is listed. Investors, who tend to believe that all companies will deliver similar returns, are often utterly disappointed when an IPO lists at a discount. They tend to dump the stock without finding the reason and regret later when the stock generates exponential returns.

For example, issues listed in October did not find considerable demand. Computer Age Management Services managed low listing gains, while UTI AMC listed at a discount after witnessing a subdued response.

“Investors should learn from their past experiences and have a clear view of why they are investing, the associated risk and time horizon before making any investment,” says Gurpreet Sidana, Chief Operating Officer, Religare Broking.

New Scale

To gauge the attractiveness of doing business, the government has announced that the companies could directly list on a few foreign stock exchanges. “With an overseas listing, much ground needs to be covered in aligning with multiple laws like the Foreign Exchange Management Act (FEMA) and direct tax rules,” points out Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services, EY India.

Word Of Caution

With the pandemic raging on, funds were raised primarily to strengthen balance sheets for near-term shocks, reinstate confidence, and to boost growth opportunities—either organic or inorganic—and to enhance leadership positions. “We believe capital raised to handle shocks may face near-term challenges as the impact of COVID-19 intensifies. However, companies with transformative and dynamic leadership could reap long-term benefits and emerge as new market leaders,” says Shah.

What To Expect?

The markets have recovered quite well from their March lows. However, a few sectors like IT, pharmaceutical, digital and healthcare have not just been re-rated but have passed their all-time high levels. Additionally, many IPOs are doing well, mainly because these are from industries that are performing well.

“Digital and pharmaceuticals will remain in vogue, but new areas could emerge, especially in segments like housing, building materials and Banking, Financial Services and Insurance (BFSI),” points out Naveen Kulkarni, Chief Investment Officer, Axis Securities.

Given that the impact of COVID-19 is reducing steadily, the sectors that were hit by the pandemic are on a path to recovery. Many companies are expected to go ahead with their IPO plans.

“The trend in IPOs will shift as preferences change from offer for sale to fundraising for capital expenditures. Hence, IPO activity over the next 12 months would be dominated not only by resilient sectors such as technology and healthcare but also from recovering sectors like consumer goods, hospitality and BFSI,” says Samir Bahl, CEO of Anand Rathi Advisors.

As per BSE IPO performance tracker, there were 49 IPOs listed in 2019 against 29 IPOs this year. With markets at a record high, investors should be selective as the traction seen last year is still not seen yet.

Before joining the IPO rush, investors should always extensively research company performances and parameters. They should find out the reasons for raising capital. Even if convinced, they should not forget that a stock’s performance on the exchange is based on many things, besides the economy or the political scenario.

himali@outlookindia.com