IPOs are not about making quick bucks. Like any other stock pick, you have to do your homework if you want to make money
WE ALL know the stock market is highly unpredictable. But there are certain things you can always predict about the market. For example, there would be a large number of initial public offerings (IPOs) lined up every time the market hits multi-year highs. This time around too, it is no different. Apart from Coal India's IPO, with an estimated size of 14,000 crore — slated to be the largest IPO in India's stock market history — there are several other small IPOs like Career Point (the first tutorial company to come up with an IPO), Va Tech Wabug (a water management company), Tirupati Inks, Eros International and Microsec Capital are queuing up to raise money from the market. According to investment bankers, several companies are likely to tap the markets in the coming months.
The markets are looking up with renewed investor interest. In this context, many pending IPOs are showing signs of hitting capital markets. With the secondary markets improving, all smaller companies, whose prospectus have been approved and were waiting, will try and hit the markets before the mega Coal India IPO.
That brings us to another predictable story in the market. When the market hovers near historical highs, many individual investors suddenly wake up to the charm of the stock market. Many of them find the primary market (or IPOs) irresistible. They believe that an IPO is a jackpot – you subscribe to the issue and sell the shares when the company gets listed. Such a simple strategy is guaranteed to make people rich in a few weeks. However, this is a wrong notion that could prove costly. Consider this: 58 IPOs have hit the market since 2009. Out of the 58, the stocks of 22 companies are still quoting below their offer price. And around 17 gave zero or negative returns on listing. There goes the simple theory out of the window. Now consider this: seven IPOs have given more than 100% returns during the same period.
Does that tell you something? Yes, IPOs are not about making quick bucks. Like any stock pick, you have to do your homework if you want to make money. You have to make sure about the pedigree of the company and the right price for it — you have a strategy in place — that is whether you are looking at it to make listing gains or want to hold on to it for a long period to realise the full value of the stock. Here are a few broad hints at what you could do:
Do A Fundamental Check:
Investing in an IPO is not different from investing in a stock that is already listed on the stock exchange. That is why it is imperative to check the fundamentals of the company. Fundamentals will include looking at the financials, the industry in which the company operates, how it is placed within the industry, the promoters and investors already present in the company. However, unlike a listed firm, there is not enough information available on the company that is about to hit the market. All you have is the prospectus of the company, which will give all necessary details, including the business, the management and the future plans.
We recommend IPOs to our investors only when we are comfortable with the long-term fundamentals of the company and the business has good growth prospects.
Merchant Bankers:
Merchant bankers play an important role in taking a company to the public. They advise on the timing as well as the pricing strategy. One should check the pedigree of the merchant bankers who are bringing the IPO to the market. There is no guarantee that they will always bring out a winner, but the chances are high that reputed merchant bankers will bring quality companies to the public. Merchant bankers also try and ensure that there is money on the table for retail investors in order to ensure that the issue is subscribed well.
Strategies To Adopt:
IPOs attract a mix of investors — some apply for the short-term or listing gains, while a few may have plans to hold it for long. We find that 80% of clients apply in IPOs for short term gains, while a mere 20% hold for the long term. A lot of times, there are a number of issues which are bunched together. Like for example currently there are several IPOs open. So if you apply for one IPO, your money is blocked and cannot be used for another IPO. So with limited resources, what does an investor do? A retail customer must not put all eggs in one basket and must spread the risk across a few good IPOs and proportionately divide the investments into those IPOs and rotate the investments in case they want to book partial profits on listing. In case you are merely looking at listing gains, then apply in an IPO where there is a chance of a better allotment with a reasonable premium, than applying in a issue that has a lower allotment chance, though the premium could be fantastic.
Apply Using The ASBA:
The traditional way of applying in an IPO is to fill a form and write a cheque for the entire amount that you wish to apply for. The company then allots the number of shares, depending on the oversubscription, and retains the adequate an amount and refunds the balance money. Under ASBA, or Application Supported By Blocked Amount, an investor submits the ASBA form to his banking branch by giving an instruction to block the amount in his account. The bank then uploads the details of the application on the bidding platform. The advantage is the investor need not pay the application money by cheque. The investor simply submits ASBA which accompanies an authorisation to block the bank account to the extent of the application money. This ensures that the investor continues to earn interest on savings bank account and his account is debited only to the extent of the shares allotted to him. Alternately, if you have an online broking account, ASBA can be done at the click of a button.
