Last week this author received a marketing call from a private bank. “Ma’am, if you open a Demat account with us, you can invest in the Zomato IPO, which will be opened shortly,” said the bank clerk. He pushed it a little further: “It’s the most anticipated IPO of the year.”
This is just one example of how the mainstream of initial public offerings (IPOs) for amateur investors has evolved. While some companies like Zomato have certainly generated more interest and excitement than others, IPOs are no longer the niche investment vehicles of institutions or well-informed retail investors.
But how safe is the money you invest in an IPO? How and when can you expect returns? These are questions to think about before completing the application forms.
Ignore the euphoria
“There is always euphoria about going public. You shouldn’t get carried away. Investors, especially new investors, shouldn’t rush to go public, ”said TR Somasundar, whose company Shilpa Associates manages over cro 120 billion in mutual fund (MF) assets.
“Most IPOs have a premium to face value. You need to see this for yourself (before you shop), ”he told The Federal. “Maybe they (lay investors) don’t have the wherewithal to understand the business and the quality of management.”
Also observe: Zomato IPO: How shares are allocated
A classic example would be Uber’s IPO. The taxi company launched a public offering in May 2019 and sold 180 million shares at $ 45 each amid massive investor craze. As soon as the company went public on the NYSE after its IPO, the first shares traded for $ 42 apiece. They ended the day down 7.6%, selling for $ 41.57 each.
In other words, the initial euphoria surrounding the IPO could not sustain the Uber scrip. The stock appreciated afterwards, but those who sold their holdings shortly after the IPO only made losses.
It is not all doom. The local IT service company Happiest Minds Technologies had an issue price of 116 yen per share when it went public last year. Since then, the scrip has risen nearly 600% and is now nearly 1,493 yen per share. That’s a decent jackpot for the IPO investors who have kept their shares.
While institutional investors are designed to cushion such declines and increases, this is often not the case with retail investors.
Listing profits are not a sensible goal
Financial experts suggest that retail investors avoid buying a stock during the IPO because they dream of seeing it enlarge after listing. If you invest at all, do so because you have a firm belief in the company’s credentials and business model, have confidence in the sector it operates in, and expect your money to grow steadily over the long term, or at least in the medium term.
Also read: Why cash-hungry start-up giants look to IPOs to make a living
“Investing in IPOs for the sole purpose of making a profit is a firm no,” said Somasundar, who is also a Bengaluru-based stockbroker. “If it’s not worth keeping, it’s not worth buying.”
It is wise to ask some basic questions about your IPO investment plan. The investment objective is important here. When it comes to a short-term goal like a next year vacation, going public isn’t a viable option.
Even if the company’s fundamentals are good, it can take a while for this to show up in the stock price. The whims of the stock market can affect your money either way. So only go public if you don’t need immediate returns on that investment.
“For a committed investor, there are always good stocks to buy on the market. Chasing IPOs may not be worth it, ”Somasundar said. “Learn about fundamental analysis and technical analysis. You will end up buying worthwhile scripts. “
Factors to Consider
However, if you are interested in an IPO, you can get involved in a specific offering if that company balances your existing portfolio. For example, if your portfolio is filled with large-cap companies that operate in traditional sectors like SBI or Tata Steel, investing in Nykaa’s IPO (if it happens) can be a good strategy.
The industry also makes a difference. If you believe that digital payments have become indispensable, Paytm’s IPO may be the perfect opportunity for you to turn your faith into an investment. But again, you need to go beyond the industry and examine the specific pros and cons of the company.
The Draft Red Herring Prospectus (DRHP), which the company submits to the market supervisory authority, is ideal for this. It’s in the public domain and contains all of the details of the company tied to the IPO – its promoters, location, finances, operations, existing investors, and so on.
More importantly, the company is required to state in the DRHP what it sees as future threats to its operations – a careful reading will increase your knowledge not only about the company but also about its peers. The DRHP goes through audits by third parties so that it receives sufficient authenticity. The print is usually small and the sentences lengthy, but don’t let that put you off.
Look out for the company’s promoters and investors. If you stay invested in the company after the IPO, this could be an advantage for you as an investor, because you will continue to be one step ahead. Going public for a state company may seem super safe, but again, be careful as there is always the possibility that it will later be taken over by a private company.
Somasundar said that even if private investors believe in an IPO, if it is a “good” company, they will end up getting very few shares. “Good issues are always oversubscribed. They can receive starvation wages, if at all. Once you are convinced of the company, buy their scrip when the list price is reasonable. Otherwise, wait for a deep market correction and buy them in reasonable quantities, ”he said.
In addition, he suggested that those interested in going public could invest in them through MFs. “Today there are mutual fund systems that only invest in IPOs – they (the stocks) analyze, hold and buy more of them at the perfect time. Outsource your headache to them, ”he added.
Somasundar warns individual investors, “Please remember – for every Happiest Mind or Nazara Technologies (a gambling company that has made solid profits after its IPO) there are 10 more duds on the IPO market. Be careful. “