Check these factors before investing in an IPO

The IPO market is buzzing again. Several blockbuster debuts have hit the bourses over the past few weeks. Stocks hitting the market have rewarded investors handsomely on listing day, capturing investors’ attention. But should you join the frenzy?With the market registering a smart uptick since March lows, retail investors have got into the stock market in droves. Millions of new demat accounts have been opened up every month for the past 5-6 months. Some of this money is finding its way into the IPO market. Three recent IPOs in particular have set the Street on fire. Happiest Minds Technologies—subscribed over 70 times—put smiles on investors’ faces when it delivered a stellar 123% return on the day of its listing last month. This was followed by Route Mobile’s splash in the primary market with a 86% gain on its debut. It shares have zoomed further since then, trading 168% over the issue price. Two months ago, Rossari Biotech had also made a smart 75% jump on listing day. Some of these strong debuts were made on a weak trading day. The recent offerings to hit the market—Chemcon Specialty Chemicals and Computer Age Management Systems—also saw huge frenzy, receiving bids to the tune of 149 times and 47 times respectively.With more IPOs lined up, investors have an abundance of choice. The lure of a quick buck among individuals is particularly high right now given that many are facing salary cuts and job losses. Making up for the shortfall in income will be topmost on their minds. However, market experts recommend exercising caution when entering through the IPO route.“IPOs tend to be mainly driven by two factors—the merits of the company itself and the prevailing market sentiment at time of the issue,” points out Ankur Maheshwari, CEO, Wealth Management, Equirus Capital. “The secondary market adds to the appetite of the IPO which can lend to heavy demand,” he adds. Market sentiments have been firmly positive until recently, giving huge fillip to the IPOs hitting the market. This can lend a lot of gloss to otherwise ordinary company listings.“When there is support from secondary market, even the weaker companies can take advantage of the frenzy,” points out Kunj Bansal, CIO, Karvy Capital.There have been several instances of average IPOs getting oversubscribed and providing no or muted return to investors. Ujjivan Small Finance Bank IPO was subscribed 49 times in December 2019. It has lost 14% over its issue price. IRCON International that saw 10 times oversubscription in September 2018 has also left investors with a 17% hole. Some IPOs that clocked smart gains on listing day have since fizzled out. Lemon Tree Hotels and Bandhan Bank among others, have gone downhill since listing day.Several IPOs have received huge response, subscribed many times overSome debutants have disappointed investors even as others have soared.78459788Investors need to be more discerning in their IPO picks, like with any other investment. “Judge each issue on its own merits rather than get carried away by the prevailing wave,” insists Maheshwari. Experts suggest passing every IPO through stringent quality filters. Ascertain not just the sales and profit growth of the company over the past few years, but also its ability to generate steady cash flows and return on capital employed. Check if the company has maintained healthy operating margins. Good management and corporate governance are also a must but investors may find little relevant information for a yet unlisted company.But only strong metrics are not enough to justify entering the IPO. At times, even seemingly good quality IPOs may fetch no return if valuations leave no room for upside. Ascertain how the company is valued relative to existing listed peers. Be skeptical if the implied price-earnings multiple suggests the IPO commands a hefty premium. Instead of getting swayed purely by the fundamentals, investors should exercise restraint and wait for lower price in the secondary market. “If valuations do not provide any comfort, it is better to wait for opportunity to enter later in the secondary market,” argues Bansal. Maheshwari contends, “If the stock is overpriced, it is simply not worth buying at that point. Wait for reasonable valuations to make your entry— the market equilibrium will eventually bring the stock price to its right level.”More recent IPO subscription figures and grey market pricing (activity in unlisted shares) seem to suggest the IPO market may lose some of its fizz. Angel Broking’s IPO received a tepid response while the grey market premium for UTI Asset Management and CAMS dropped sharply. With the market sentiment turning weak in last few days, IPO gains in coming days are likely to be more tuned to company metrics. A lot will also depend on how much the upcoming market debutants leave on the table for investors.

from Economic Times https://ift.tt/34ig1Za