Post Covid-19, it’s not only the secondary equity market that saw a lot of boom and excitement. The primary market, which began in the year July 2020, has also been exciting. The IPO season kicked off with Rossari Biotech in July 2020, and since then, the momentum has only accelerated. In the latest IPO list, we have already seen 25 IPOs hitting the market. The frenzy will not end here as a lot of other IPOs of newly listed company in the stock market are still lined up for CY21 and include the mother of all IPOs – LIC, expected to hit the market by end of the year.
With so many IPOs flooding the market, one needs to be selective and pick the right IPO as per his risk appetite. The recently listed stocks and IPOs have given more than 100% returns and are luring more and more retail investors towards the primary market. But not all IPOs are successful. Even if the company has good fundamentals, it may not necessarily garner a lot of interest or see a successful listing, for instance, Spandana Sphoorty, IRCON, Bharat Dynamics. Thus, IPOs need to be looked at from a different perspective as compared to investment in the secondary market. An investor should evaluate what's special about the company and whether it makes a good fit in their portfolio. Hence, it becomes crucial to understand what factors drive the IPO outperformance and what results in failed IPOs.
IPO investment strategy: an expert’s guide
One must understand the business model of the company and evaluate what moat does the company enjoys. Is it a leader in its space or has it created a niche for itself in a crowded space or is it a first-of -its- kind listing? For example, Nureca, a home healthcare and wellness product company, despite its small issue size of Rs100cr, got 40x subscribed. As the first digital company in this space, with high growth history and potential to scale led to stellar listing gains of 58%. Another example can be Nazara Technologies, which is a pure gaming company and the first of its kind to get listed in India. Backed by a few good investors, it is drawing a lot of frenzy.
In fact, CY20 saw many niche businesses get listed like MTar, Gland Pharma, Route Mobile. Route Mobile has been the most successful IPO of recent times as it's present in a niche business with strong growth potential and high entry barrier, and thus we saw returns multiplying. To date, the stock price has become almost 5x its issue price.
However, companies present in already crowded space are not getting a lot of attraction, until and unless they have a specific moat. For example, Home First Finance, Suryoday SFB got a poor response. But Indigo paints saw a good response despite being in the paints industry as it has created a different market for itself by being present in decorative paints. Similarly, Happiest Mind (though a midcap IT company, has major exposure to Digital IT which is booming the most at present and is expected to be the next big theme along) saw its price become 3x since listing. Some of the chemicals companies that got listed in past one year like Rossari Biotech, also gave handsome returns as the whole sector is expected to gain tremendously from China Plus One strategy adopted by MNCs and PLI scheme being rolled out by the government.
It has been observed that if the business is good and the financials are decent or expected to turnaround quickly, then investors are ready to ignore the valuations to a certain extent. In the last one year, almost all IPOs were priced aggressively but despite that, the majority saw huge oversubscription and gave robust listing gains.
Thus some of the parameters to consider while evaluating IPOs are:
1. Business/industry prospects
2. Promoter background
3. Objects of the IPO
6. Threats faced by the company.
ASBA through UPI route
Once the investor identifies which IPO to apply for, he needs to decide upon how to apply for IPO. Retail investors till now used to apply through the ASBA route whether offline or online. As the name suggests, ASBA or Applications supported by Blocked Amounts, is a process through which authorized banks block funds in the IPO applicant’s account. Online mode is much convenient and IPO can be applied in just one click. These days one can file online IPO application through UPI, wherein one needs a UPI mobile application and a UPI ID. This broadens the options and ease of payment for the investors.
Retail or HNI category
The next question is whether to apply in the retail category or HNI category.
Retail Route: If the investment is less than Rs 2lakh, one needs to apply at the cutoff price. In the case of oversubscription, the chances of rejection increases, so it makes sense to apply for all family members to increase the chances of allotment.
HNI Route: Investment has to be more than Rs 2lakh and in the case of oversubscription, shares are allotted on a proportionate basis.
But one must keep in mind that while applying under the HNI route, with funding facility interest and other charges should be kept in mind while calculating the cost of the transaction. For example, despite the good grey market premium seen in MTAR Technologies, the HNI investors lost heavily. So depending upon your conviction, one must apply under either of the above routes.
Exit or hold for long term
Once you have invested the next thing is to have an IPO exit strategy to maximize gains. Short term traders can book the IPO listing gains depending on how the IPO opens. Normally in a bull market, IPOs tend to give strong listing gains as it has been witnessed recently over the past few months. Of the 25 recent IPOs, only 4 IPOs gave negative returns on listing day. In the case of successful IPOS. 10 companies saw more than 50-100% gains. Long term investors, on the other hand, can hold on to the investment if the outlook of the company looks good in the long run. Of the 35 companies that came with IPO over 2018-19, 17 companies have given more than 50% returns. Hence, depending on one's risk appetite and conviction, one can frame the exit strategy.