💎 The IPO Rush - Opportunity or Hype?

What is an IPO?

An Initial Public Offering (IPO) is a company's entry into the stock markets.

In simpler terms, it's when a company wishes to get its shares listed on a stock exchange so that investors can buy and sell its shares freely on the stock market.

Think of it as a business opening its doors to public investors, allowing them to own a piece of the company. This move provides the company with funds for growth and offers everyday investors a chance to share in its future successes or challenges.

How do IPOs work?

Here is a step-by-step breakdown of how a company offers an IPO to the public:

1. The decision to get listed: The company decides it's time to raise capital by offering its shares to the public. This decision has to be approved by all the shareholders.

2. Hire merchant bankers, investment bankers, and underwriters: These financial experts help the company navigate the IPO process, from setting the share price to marketing the IPO.

3. Due diligence and documentation: The company, with its merchant bankers and legal advisors, prepares a detailed document called a 'Draft Red Herring Prospectus' (DRHP) if it is a book building issue and a 'Draft Prospectus' if it is a fixed price issue. This contains vital information about the company's finances, business model, and potential risks that help investors evaluate the issue.

4. Regulatory review: The draft prospectus is submitted to the market regulator (SEBI - Securities and Exchange Board of India) for seeking their no objection. Exchanges give their in-principle approval, and then SEBI gives their no objection. This ensures all disclosures are in place, safeguarding the interest of potential investors.

5. Pricing the IPO: The company and its bankers set a price range for the shares. This is based on the company's valuation, market conditions, and investor interest.

6. Marketing and roadshows: Before the IPO launch, the company goes on a promotional spree, presenting its story to potential large investors and gauging interest.

7. IPO launch: The shares are offered to the public. Investors can now apply to buy them.

8. Share allotment: Based on demand, shares are allotted to investors. Not everyone might get the number of shares they applied for, especially when the IPO is oversubscribed.

9. Listing and trading: Post allotment, the company's shares are listed on the stock exchanges. Investors can now buy or sell these shares freely in the open market.

Performance of IPOs in India

In the first half of 2023, India emerged as a global leader in the number of IPOs. A staggering 80 firms made their debut on the stock exchanges, marking a 33% year-on-year growth from the 60 listings in the same period of 2022.

The surge in IPOs was predominantly driven by Small and Medium Enterprises (SMEs). Their listings showcased the vibrant entrepreneurial spirit and activity in the country.

Despite the uptick in the number of IPOs, there's a contrasting narrative when it comes to the capital raised.

Companies garnered a total of $2.1 billion through IPOs in the first half of 2023, a significant 62% drop compared to the same period in the previous year. This suggests that while more companies are going public, they might be raising smaller amounts.

On the global front, while there was a 5% decline in the number of IPOs in the first half of 2023, India's contribution to the global IPO pie has been on the rise. From a 6% share in 2021, it surged to 11% in 2022 and further rose to 13% in the first half of 2023.

India's IPO market is not just thriving; it's leading on the global stage. However, the gap between the number of listings and the capital raised warrants a deeper dive, emphasising the importance of nuanced understanding for potential investors.

Are IPOs a gold mine for investors?

The allure of IPOs often lies in the promise of striking gold. But, like any investment, IPOs come with their own set of risks.

While IPOs like Paytm and Zomato generated immense buzz, their post-listing performance serves as a cautionary tale.

• Paytm - Despite its highly anticipated debut, Paytm's (One 97 Communications) shares plummeted by over 20% on the first day and are still struggling to touch its listing price, leaving many investors in the lurch.

  

  
  

• Zomato - Although it had a strong start, Zomato's stock has seen significant volatility, making it a risky bet for those looking for predictable returns.

  

  
  

The key takeaway?

Due diligence is non-negotiable. Without a deep dive into the company's fundamentals, market conditions, and valuation, investing in IPOs can be very risky.

The bright side

Here are some of the top-performing IPOs in 2023:

Like any investment, IPOs require a balanced approach, informed decision-making, and, most importantly, a clear understanding of one's financial goals and risk appetite.

Investing through IPOs

1.Pre-IPO

Before a stock is placed on a public exchange, a substantial number of shares are sold privately through a pre-initial public offering (IPO) placement.

Pre-IPO investing refers to buying shares in a company before the IPO opens. The pre-IPO price may be at a premium pricing since it is an assured allotment.

2.The primary market:

This is where companies directly issue new stocks to the public for the first time. As an investor, you can buy shares directly from the company at a price set by them. Here's how you can invest in this market:

• Open a Demat account: Before you can invest in any IPO, you need a demat and trading account.

• Choose an IPO: Keep an eye on upcoming IPOs through stock exchange websites or your brokerage platform.

• Fill out the application: IF there is an IPO that you want to apply for, fill out the application form either online through your broker or by using the ASBA (Application Supported by Blocked Amount) facility from your bank.

• Wait for allotment: If the IPO is oversubscribed (more demand than shares available), you might get fewer shares than you applied for or none at all. If allotted, the shares will be reflected in your demat account.

Something more you need to know:

The grey market:

Grey market IPO is an unofficial market where investors can buy/sell IPO shares/applications before they are officially launched on the stock exchange.

As it is an unofficial over-the-counter market, it is unregulated.

Many investors rely on the grey market price to apply in IPOs. While the grey market is a good way to gauge interest in an IPO and the general sentiment, it should be only one of the factors that investors should consider.

Factors to consider in an IPO

If you have considered everything we discussed earlier and would like to apply for an IPO, here is a list of things you should consider:

• Company's track record: Research the company's past performance, leadership, and business model.
• IPO pricing: Is the IPO overpriced or underpriced? A fair valuation is crucial.
• Market sentiment: Broader market conditions can influence an IPO's performance.
• Use of proceeds: How does the company plan to use the funds raised? Expansion, debt repayment, or other purposes?
• Regulatory scrutiny: Ensure the company has all necessary approvals and is in compliance with market regulations.

While the potential for lucrative returns beckons in applying for IPOs, it's paramount to approach IPOs with caution and knowledge.

The essence of successful investing lies in thorough research and aligning with one's financial vision.