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Scenarios of When to Invest in IPOs

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

Right timing
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.

Market conditions
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.

IPO valuations
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 listing performance.

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 listing time.

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.

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