Factors to Consider Before You Invest in IPO
How do you judge an IPO and what to consider before investing in the IPO. You need
to consider the pedigree of the company, the pedigree of the BRLM, the business
of the company, the pricing of the issue and the listing performance of recent IPOs.
The consolidated picture will give you a good starting point to evaluate whether
to invest in the IPO or not.
Remember a basic rule in the IPO market that you as an investor are not obliged
to put money in every IPO that is marketed. You must take your own decision after
doing a thorough analysis. Of course, you can always consult your broker or your
financial advisor before committing money into an IPO but the final decision should
be entirely yours. In a growing economy like India, you will see a deluge of IPOs
in the next few years so being choosy will help you a lot.
5 Factors to Consider While Selecting an IPO
IPO versus secondary market
Is the IPO likely to give you better returns than buying in the secondary markets?
There are two issues here. Firstly, whether the issue is aggressively priced and
secondly whether the post listing price will leave anything for you on the table.
Go by recent experiences and be guided by what similar IPOs have delivered to investors.
When it comes to IPOs pedigree matters but it is not everything. For example, look
at the recent insurance IPOs. HDFC Life and ICICI Lombard did very well post listing.
However, GIC Re, New India Assurance and SBI Life have disappointed. Pedigree of
the issuer and BRLM matters but ultimately it is the pricing that makes a big difference.
You typically get into an IPO to either make listing gains or hold on for the long
term. If you are going for listing gains, then don’t think too far ahead. If you
intend to hold then look at whether the stock is disruptive. Avenue Supermart and
Shankara Building were disruptive. SBI Life has market potential but it may take
a long time. Put your IPO investments in perspective.
Market bunching of IPOs
Be cautions if the IPO is being bunched with other IPOs which are large in size.
Such IPOs are likely to get tepid response and hence the post listing performance
may also be quit lacklustre. Be cautious in these cases. Even if the IPO has merit,
the stock may still have a tepid listing due to the market conditions.
Don’t ignore market conditions, especially if you are borrowing to invest. Firstly,
if you are borrowing to invest then you need to have only reasonable oversubscription
as too much oversubscription will add to your cost. Also, the post-listing performance
must be strong enough to give you an exit after considering your cost of financing
the IPO investment.
Three Types of IPOs to Avoid as an Investor
Let us also look at the negative list of IPOs that you must ideally avoid. Forget
about the fact that you missed the post-listing performance. It is not worth the
Large capital base
Avoid IPOs where the capital base of the company is too large. They are just not
going to generate wealth either in the short term or the long term. We have seen
that with most infrastructure companies in India in the last 10 years and they have
simply destroyed equity wealth since their listing.
Avoid IPOs with too many regulatory and legal check points. If you find too many
red flags in the IPO prospectus in terms of contingent liabilities, corporate governance,
audit qualifications, legal cases, compliance issues etc, just avoid the IPO. It
may get a good listing and flatter investors but it is better to err on the side
Avoid putting money in IPOs if the market is under pressure from domestic and global
factors. You can buy them at lower prices on secondary listing.