All you need to know before investing in that IPO
Finance
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The drought in IPOs in 2020 ended with the recent bumper listing of Happiest Minds Technology Ltd. and Route Mobile Ltd. A flood of IPOs are now lined up with companies hoping to ride the wave of upsurge in retail participation and the positive trend in the market.
Happiest Minds Technology Ltd
Subscription - 151x
Listing Day Gain - 123%
Route Mobile Ltd
Subscription - 73x
Listing Day Gain - 86%
What are these mythical IPO’s and should you invest in them? Let’s dig deeper.
What is an IPO?
An Initial Public Offering(IPO) is the process of a private company going public for the first time through new stock issuance where any investor can purchase shares of the company directly from the issuer.
How do we know the right price for a share of a private company?
Here’s where investment banks selected by the company step in as intermediaries to market, gauge demand, provide underwriting services* and most importantly, set the IPO price.
*Take on financial risk by pledging to buy unsold shares.
IPO 101
IPO Subscription: This is the number of times a public issue has been subscribed.
100 shares on offer - Bid for 200 shares - Oversubscribed (200% or 2x subscription)
100 shares on offer - Bid for 50 shares - Undersubscribed (50% subscription)
IPO Price: Price range at which the company expects to sell its stock in the public offering.
Listing Price: Price at which the stock opens in the market on the first day of listing.
Lot: Unit of subscription consisting of minimum number of shares.
Why Invest?
Listing Gain*: As IPOs tend to be undervalued to attract higher participation in the issue, the primary reason for investing in shares is to buy via IPO and sell on the first day of listing at a higher price.
Long-Term Gain: Companies with growth potential and strong fundamentals are great opportunities to buy and hold for the long term.
IPOs seem lucrative, right?
Let's dig deeper into prior IPO performance and validate this using data.
*Listing Gain = Listing Price - IPO Price
Subscription Vs Listing gains
For all IPOs in 2018-2020, there was a strong correlation between Subscription and Listing Gains.
Correlation Coefficient: 0.7
IPOs with highest subscription in 2018-2020
1. Apollo Micro Systems
Date: January 2018
Subscription: 249x
Listing Gain: 65%
2. Ujjivan Small Finance Bank
Date: December 2019
Subscription: 166x
Listing Gain: 51%
3. Amber Enterprises
Date: January 2018
Subscription: 165x
Listing Gain: 44%
4. Happiest Minds
Date: September 2020
Subscription: 151x
Listing Gain: 123%
5. IRCTC
Date: October 2019
Subscription: 112x
Listing Gain: 128%
Subscription Vs Current gains
For all IPOs in 2018-2020, there was no correlation between Subscription & Current Gains.
Correlation Coefficient: 0.1
While demand (subscription) for IPOs are strongly correlated to listing gains, no such correlation exists between demand and long-term prices.
Higher subscription is not an indicator of long-term performance.
High listing gains Vs Long-term performance
For all IPOs in 2018-2020, there was a weak positive correlation between Listing Gains & Long-term price.
Correlation Coefficient: 0.4
37% of IPOs that had listing gains are currently trading below listing price (On average, current price is 29% lower than listing price for these stocks).
Higher subscription is not an indicator of long-term performance.
Fundamental Analysis
Every company should be judged by its own merit through the IPO Prospectus*. The prospective provides all the information on the opportunities and risks in investing in the company. It is essential to understand the company’s use of the IPO proceeds and analyse financial statements to understand the future growth potential of the company.
Key information to watch out for:
Market position in industry and comparison with peers.
P/E of stock v/s Industry P/E.
Revenue, EBITDA and PAT growth projections.
Debt and Asset Utilization.
*IPO Prospectus - Mandatory document published by the company and investment bank pre-IPO.
Should I invest?
Have an active demat account and some funds lying around? Keeping market risks and these insights in mind, have a go at a slew of upcoming IPOs that will provide an opportunity to make yourself some money!