Scenarios of When to Invest in IPOs
There is no appropriate time to invest in an IPO but that decision will largely
depend on whether the IPO is reasonably priced or not. But the thing rule is to
avoid investing in IPOs at the peak of a bull market because that is when IPOs generally
tend to be richly priced.
What Impacts Decision to Invest in IPO?
There are various factors that go into whether one should apply in an IPO or not.
For example, the timing of the IPO is important from an investor’s perspective.
Also the timing of the listing of the IPO also matters to the decision whether to
invest in an IPO or not. The valuation of the IPO as compared to the peer group
is also an important factor that goes into whether to apply in an IPO or not. For
example, those who invested in IPOs at the peak of the technology boom in 2000 had
to wait for more than 7 years to get an exit from these IPOs at parity.
Seven Scenarios when you can Invest in an IPO
Invest in an IPO if the timing is right. When we say timing we refer to the timing
of the story that is implicit in an IPO. For example, today the market is unlikely
to be impressed by a PSU bank IPO even if it is a good bank. That is because most
PSU banks have destroyed wealth in the recent past. On the contrary private banks
like RBL and Bandhan have got tremendous response and have also been instrumental
in creating wealth for the investors.
Timing of the issue and the market conditions at the time of the IPO matters a lot.
For example, if the Nifty has just corrected 15% ahead of the IPO opening date,
then investors are likely to be sceptical. That is because they are not sure if
the price is right and they must also be facing tight liquidity conditions due to
notional losses on their portfolio. Similarly listing time also mattes as listing
in a bad market is not a great idea.
Check if the valuation is in tune with the peer group. It is understandable that
some IPOs may price their IPOs above the market average for specific reasons which
may be justifiable. But when the valuations are too steep, then there is cause for
worry. As an investor in IPOs, your primary consideration must be whether the IPO
leaves something for you on the table or whether the pricing is rich enough to swipe
out all the possible gains?
IPO cycle stage
When the IPO investment cycle is just about starting out or is in its initial heels.
You would have noticed that when the IPO run started in early 2015, the post listing
performance was a lot more robust in most cases. However, in the recent past, the
post listing performance has been less than encouraging. That is a normal trend
in most of the IPOs because as you get into matured territory, the gains reduce
for the investor.
Crowding of IPOs
Check if IPOs are getting crowded out at the current juncture. If you have 5 large
issues that will absorb most of the liquidity from the market, then you are unlikely
to make any worthwhile money by investing in the IPO. It is only when issues get
substantially oversubscribed that you stand the chance of getting a strong post
Past track record
Invest in IPOs when historical listing gains are attractive. You do not invest in
an IPO purely for the listing gains but that gives you an idea about the demand
for the stock around listing time. Timing of the listing is also important and it
may be best to avoid IPOs where there likely to be tumult in markets around the
In sync with your portfolio
Finally, invest in IPOs to diversify your equity portfolio. With basic due diligence
you can identify the right IPOs to invest and ensure that a majority of the IPOs
you invest in will give an attractive listing. That is a good enough scenario to
invest your money and make profits out of the IPO markets.