Stock markets have taken a hit in the last 10 days following the Russian invasion of Ukraine. As oil prices continue to rise, the Sensex is down 3.7% in the five trading sessions since February 24th. This has raised concerns about the initial public offering (IPO) market, particularly the upcoming IPOs, where 51 companies have received approval from market regulator SEBI for their IPOs. While the IPO market has been booming in 2021, investors need to be wary of upcoming issues and should instead look to already listed companies with good fundamentals.
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Will Companies Postpone IPO Plans?
If the Ukraine conflict drags on and crude oil prices remain elevated, there is a chance that equity markets will remain subdued. With the IPO market tied to stock market performance, issuers are likely to wait for a better time – until the Ukraine conflict ends and stock markets stabilize, investment bankers said. The public offering of LIC, through which the government planned to raise around Rs 60,000 crore, is expected to be postponed now. Experts say that even if a company issues a public offering, it may not see the enthusiasm of the past year and returns may also be limited.
How have the last editions developed?
In the last 11 months, 50 companies managed to raise over Rs 1.1 lakh crore from the equity markets – the highest mobilization in a year. Small investors lined up in large numbers and many returned empty-handed as issuance was overrun; Some of them have even been subscribed to over 100 times.
The performance of the issues shows why the investor must be cautious. While 22 of the 50 issues launched this fiscal year are trading below their issue price, nine have returned less than 11% — the Sensex gain since April 1, 2021. Some new-age companies have fallen amid market volatility recently .
Should You Invest in New Businesses?
Market experts say that investors need to be very careful about this. Currently, One 97 Communications (PayTM) is trading at a discount of 63% to its issue price and Car Trade Tech is trading at a discount of 65.8%. FSN E-Commerce Ventures (Nykaa), which peaked at Rs.2,574 above its issue price of Rs.1,125, closed at Rs.1,502 on Thursday – a premium of 33.6% over the issue price. Zomato, whose share price more than doubled after the listing, is trading at a premium of 8.1% to its issue price.
Experts say that while these new-age tech companies have commanded high premiums and benefited from market liquidity and investor enthusiasm, sentiment is flagging. “There is a lot of irrationality around the world when it comes to startups. It’s important to understand that when a market corrects, investor confidence is shaken, even if a company reports a quarterly earnings decline. In most of these companies, where profitability is not visible over the next five years, it is very difficult for an investor to stay invested, and that is exactly what has happened over the past few months,” said the research lead with a leading financial services company.
Should you go for recent IPOs?
After the last 11 months’ rally, equity markets are likely to remain volatile in the near term for a variety of reasons: global inflation concerns, retreat from global liquidity, rising bond yields and interest rates – and now geopolitical tensions and rising crude oil prices. Upcoming issues may not be able to match the interest generated by issues launched over the past 11 months.
While this may limit gains, investors can choose companies that have a solid business model and growth potential. Relatively weak equity markets would also mean issues could be priced cheaper, which would be good for investors.
Is a high subscription a good indicator?
In many cases it is true. When the qualifying institutional segment receives strong subscription, it indicates that institutional investors who have the resources to conduct due diligence are comfortable with the company’s prospects.
However, this has not been the case for several editions over the last 11 months. Krsnaa Diagnostics Limited, whose issue was more than 64 times oversubscribed, is currently trading 41.5% below its issue price. Windlas Biotech, over 22 times oversubscribed, is trading 47% below its issue price.
What should investors pay attention to?
An IPO is a derivative of the secondary market. When secondary markets are strong, investor sentiment is high and IPOs tend to do well. However, this does not apply in all cases. Investors need to study the company thoroughly – quality of promoters, business fundamentals, and financial and peer review analysis. Corporate governance practices should be given top priority. Investors need to study other publicly traded companies in the industry and compare their growth and PE (market price to earnings per share) ratio. If the company coming up with its IPO wants a higher valuation, it can skip the topic.
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