An Initial Public Offer (IPO) is when an unlisted company issues shares to the public.
The IPO can either be through an issue of fresh shares or the existing shareholders
may be selling part of their stake to the public. In the first case, the new offer
increases the capital base and dilutes EPS. In the latter case of an Offer for sale
(OFS), the capital base remains the same and only ownership shifts hands. The OFS
is not EPS dilutive.
An obvious answer to why companies go public would be to raise funds for expansion.
But that is only one of the reasons that trigger an IPO. There are a lot of other
reasons, both tangible and intangible why companies adopt the IPO route. Let us
look at some of them.
If you apply in retail quota of an IPO, you stand a better chance to get an IPO
allotment. That is because the IPO allotment process has been designed in such a
way that the ownership is as varied and widely spread out as possible. The intent
is to bring as many people into the equity cult as possible and you stand to benefit
in the process. That substantially increases your chances of getting allotment in
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Your IPO application commences from the point of deciding that you want to apply
for the IPO after reading through the prospectus. You will have to start off with
choosing whether you want to invest online or offline. That is the first step.
The IPO application for any book built issue can be either made offline by filling
up a physical form and submitting to the broker or the banker or online through
your online trading account. Actual online IPO applications are a lot more convenient
because data pertaining to your account is automatically downloaded from your DP
master data and the online application process for IPOs is a lot simpler and more
efficient. This also reduces the chances of errors.
Whether you apply for the IPO via ASBA or through non-ASBA, you need to ensure that
your bank account is adequately funded. The only difference in ASBA is that the
amount gets blocked. In both the cases, if there are insufficient funds in the bank
account then the application gets rejected outright.
Normally, companies define a price range for bidding in the IPO. In case you are
not sure what price to bid at, then you can just bid at the cut off price. In that
case, it will be assumed that you have bid at the discovered price and the allotments
will be done accordingly. You will be allotted shares at the discovered price. This
is a good idea if you don’t want to bid at a price and get rejected because your
bid was lower than the discovered price of the IPO. The problem with quoting a price
is that if the discovered price is above the bid price then your bid gets automatically
Mention clearly what quota you are applying under. While the retail quota has a
35% allocation, the HNI quota has a 15% allocation and includes all bids above Rs.2
lakh. You can select your quota based on your discussion with the broker as to which
quota will be better to apply in. Ensure that all your bank details and DP details
are filled up fully and properly.
An IPO is after all an investment in equities so you need to apply most of the secondary
market checks here too. However, since not much is available on the public forums,
you need to rely extensively on the prospectus of the IPO. Here is what you need
to consider before applying
Here you should look at the rate of growth of earnings and also if it is sustainable.
Higher earnings growth means higher P/E valuations and so earnings are critical.
Any valuation (P/E ratio) assigned to the company today must be justifiable in terms
of future earnings for the next 3-5 years. You surely want to invest in a company
with footfalls and eyeballs but limited revenues and elusive profits. Unless revenues
and profits are there in the next few years to back up the valuation, investors
may not be too interested.
Sectoral benchmarks can be a good guide. There are likely to be nuanced differences
but that is OK. Look at benchmarks in terms of the industry group to which the company
belongs. You can look at comparable parameters like P/E, EV/EBITDA, P/BV, Dividend
Yield etc. For example, if mini steel plants are quoting at an average P/E ratio
of around 8X then a mini steel plant IPO cannot be brought at a P/E Ratio of 16X.
IPO valuations that are out of line with the secondary markets cannot really be
accepted unless there is really something disruptive about their business model.
Why does the company do what it does and how well does it do the job? That is a
primary question you need to ask about any IPO. Does the company bring some unique
strength to the table? These strengths can be in the form of some unique brand or
some specific product line that has no competition. It could also be an advantage
in the form of entry barriers it has created in the industry. If the industry is
disruptive, check how the company is prepared to take on competition. Competition
can come from the most unlikely places.
In good market conditions, most IPOs tend to be priced quite rich as the opportunity
is there. Be careful and ask why the premium is justified. In the last few months
we saw quite a few IPOs that did not match up to expectations and hence disappointed
the markets because the premiums were just too steep. Don’t invest in the IPO unless
you can justify the premium of the IPO.
Quite often investors wonder how they can do the channel checks. It is not too difficult.
If an auto ancillary company is making tall claims, go to the auto ancillary association
website and check out the details. Cross check the data with some of the competitors
and distributors. If it is a consumer stock then walk down to the nearest store
or supermarket and check out how they are getting shelf space and check how fast
the products are moving. All these channel checks can be of help.
An initial public offering (IPO) is an offering of fresh shares to the public with
a view to listing the company in the stock exchanges. The IPO market is also called
the primary market and is to seen as distinct from the secondary market.
Essentially IPOs are done for one of the two reasons. Firstly, an IPO is intended
to raise fresh capital to finance the expansion / diversification plans of the company.
An IPO can also be in the form of an offer for sale where the IPO is done to give
an exit route to early investors in the company.
You can apply for an IPO either offline or online. An offline application can be
made by filling up the IPO form and submitting it physically to the banks / brokers.
Alternatively, you can also apply for the IPO through your online trading account
interface provided by your broker and it is a lot simpler.
No, you cannot put multiple applications for an IPO and there can only be one application
under one PAN number. If there 5 members in your family then you can put in 5 applications.
But duplicate applications in the same PAN is barred and your application is likely
to be rejected.
IPO allotments are typically made under 3 broad categories viz. Retail, Non-Institutional
(HNI category) and Qualified Institutional Buyers (QIB). There is a 35% allocation
to retail in book built issues and 50% for QIBs. In addition, some IPOs also have
a special allocation to employees.
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