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Factors to Consider Before You Invest in IPO

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.

Promoter background
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.

Listing gains
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.

Market situation
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 trouble.

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.

Red herrings
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 of caution.

Negative macros
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.

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