Of late, India’s Initial Public Offering (IPO), the primary market, has seen a lot of action. There have been bumper listings of well-known brands in recent times. In fact, such has been investors’ response to companies which came out with IPO that experts are using the phrase ‘IPO Frenzy’ to describe the mammoth fund raising by companies. It is estimated that in the first four month of the present fiscal as many as twelve firms have raised over Rs27000 crore through IPO. Investors have made huge sum from exceptionally high listing gains offered by shares of Zomato and Happiest Mind.
But not all IPOs offer huge listing gains. There are IPOs which disappoint investors. In such a situation, it is important to understand factors which can help you identify good IPOs. Here are a few tips that can help you get allotment and make money too:
Issue objective
You need to know why a company is raising money. If a company intends to use the money for growth or expansion purpose and estimates are fair, then it can be a good opportunity. If the IPO is nothing but offer for sale giving exit to existing investors, then you have to study the company in greater detail.
Promoter background
If the promoter of a company has a good record of operating a business and the same can be checked with its peers, then the company can make money for you. Do not invest in a company floated by a promoter who has a track record of duping non-promoter shareholders.
Products and services
If a company’s business is in a sunrise sector and there is a large addressable market then it can create value in the long-term. Investors should consider such an IPO. If a company is in cyclical business, then you should check at what stage the industry’s demand cycle is. If the demand cycle in an industry has peaked then such an IPO must be avoided.
Business
One of the key variables in understanding the sturdiness of a company’s business model is efficiency. If a company’s business is growing at a stable rate or its profitability is rising then such a company can be a good investment candidate. But if a company is yet to start operations then it is better to be careful about such companies. If a company is yet to make profits then you should think two times before investing in such a company.
Brands and IPR
You also need to look at assets of a company especially those that command premium. Brands, intellectual property rights and patents are important. You must know if a company has royalty agreements. If a company has royalty agreements, then it is important to know the quantum of payouts of royalty. If they are above market rates, then it is clear red flag.
Valuations
If an IPO issue of a company is commanding reasonable valuation, then you should subscribe to it. More you overpay, less likely you are going to make money in the near-term.
Chasing returns
Just because an IPO of a company from a particular sector did well, that does not mean all other companies will do well. Do not blindly chase past returns and trends. You must avoid too small companies. Though they may have scope to grow, let them prove their worth through strong and sustainable performance over a sufficiently long period.
Subscriptions numbers
As an investor it is crucial to keep a tab of subscription details of IPOs. If an IPO has generated lukewarm response, especially from institutional investors, then it is better to avoid it. You can try your luck with IPOs which have received good response and which have good business fundamentals.
Account details
You can apply in an IPO through your family members’ accounts to improve the chances of getting allotment. Since One-PAN-One-Application is the norm, there is no point applying from various demat accounts of the same person.
No IPO funding
This is a big trap. In a period of high frenzy when a few IPOs provide good listing gains consecutively, the desire to gain from the frenzy compels many investors to borrow money. You must avoid taking IPO funding. The rate of interest payable on financing has gone up. This does not leave much for investors who borrow money to invest in IPOs.