What first-time investors should do before putting money in IPOs

There is a lot of liquidity which is driving the over-subscriptions in IPOs that hit the market in September as well as the strong listing gains, says Pranav Haldea, MD, Prime Database.

On recent spate of listings
This year, record fundraising has been taking place via the IPO route or QIPs or rights. Companies are raising a record amount of capital to shore up their balance sheets. The other key aspect is that after the March lows, there has been a sharp uptick in the secondary market and on the back of this bullishness, we have also seen revival in the primary capital market. There is a lot of liquidity which is driving the over-subscriptions that we have seen in the IPOs that hit the market in September as well as the strong listing gains.

On cos that will sustain interest after IPOs
I do not comment on specific IPOs but given the sort of response that we have seen and also if I were to do a bit of a historical analysis in terms of the last five years and IPOs which got launched, we come out with a very mixed picture. There are some which are still trading above the issue price, some are not. I personally have always believed that after listing, any company becomes like any other secondary market listed company which is driven by industry prospects, the company’s own financials and broader market sentiment. My view is it is a bit unfair to hold IPOs to test every six months or one year or two years or five years and say that these IPOs performed well and these did not because after the IPO, they become like any other listed stock.

On discerning investors
One of the trends that we have seen in this year is that you had the big IPO of SBI Cards back in March and, of course, then the pandemic stuck and there was a lull for nearly four months till the time Rossari Biotech hit the market. One of the trends that you are noticing right now is that given what has transpired over the last seven to eight months, there are IPOs from select companies from select sectors which have not been impacted adversely by the pandemic. In fact, some of them may even have benefited. So companies from telecommunication, pharma, bio space are coming and hitting the market and you are also seeing good response to these issues.

But at the same time you had an infrastructure company which came to the market which had to then extend the date and also lower the price bandWhile there are about 27 odd companies which are sitting with SEBI approval, a lot of them belong to sectors like real estate, hospitality — sectors which we know have really faced the brunt of this pandemic and I would not be alarmed in case you do not see any of these companies launch their IPOs. Sebi has also granted a six- months extension to their approval timeline.

You will continue to see deals from sectors like telecom and pharma. In fact, if one just looks at the last week of September, there were five new filings from companies including the government’s RailTel company as well which is from the telecommunication sector. So, you will see select deals from select sectors and, of course, investor interest would also be focussed more on companies which have not been impacted as a result of this pandemic.

“IPO continues to remain one of the most risky asset classes. You you would be better advised to invest either in already listed companies or better even in the mutual funds.”

— Pranav Haldea

How safe is it to invest in IPOs
We have seen a surge in retail participation in the last few months and there has been a flurry of new demat accounts opened by retail investors. From a valuation perspective, given the structure of the Indian market, retail can very comfortably follow the institutional investor cue because a lay retail investor may not be in the best position to assess whether the valuation is appropriate or not. At the same time, my word of caution to first time retail investors would be that one should not get driven by seeing these huge listing gains or oversubscription figures. IPO continues to remain one of the most risky asset classes because if there is a company which is only being traded on the stock exchange in the secondary market, you have a whole wealth of data, information, disclosures which are available about it. But an IPO is from an unlisted company and still very little is known about it.

So my word of caution to retail investors and especially first time retail investors would be from a valuation perspective, look at where the institutional investors are participating and at the same time look at the promoters, the governance of the company before putting in your money. Till that time, you would be better advised to invest either in already listed companies or better even in the mutual funds.

Excess liquidity & IPO success
Unfortunately, what we are seeing in the secondary market and what is really playing out in the real economy are not like-to-like situations. There’s a lot of pain in a majority of these sectors in the economy but the markets are not reflecting that. As a result of low interest rates and excess liquidity, all of that money is getting channelized into the markets and also into the primary market. I do not see it sustaining for a long time because at some point, the market will catch up with the real economy.

Crucial points for investors
For retail investors, from a valuation perspective, one should follow the cue from institutional investors. Two, look at some of the other listed peers, companies in the same sector, same industry and the sort of the valuation they are trading on. Three, look very closely at the promoters, their background and the governance aspects of the company. Retail investors should keep in mind these three-four key parameters before investing in IPOs.

Finally, it is very easy to get into a rush of things, given the sort of listing gains that one sees. My advice to retail investors is they should be cautious and evaluate each IPO on its own merit before putting in their money.

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