#12: What's hurting the IPO sentiment?
Every investor dreams of making a fortune in the stock markets. IPOs have traditionally been the most tempting of the lot. They have been popular for stellar listing gains, and the general excitement around a business going public.
The year 2021 has been a year of IPOs. 36 companies have debuted on the NSE this far, with 4 months still to go (and some major listings yet to take place). Some companies have more than doubled the investor money since their listing - such as Stove Kraft, Nureca, MTAR Technologies, Easy Trip Planners, Laxmi Organic Industries, Barbeque-Nation, and Tatva Chintan Pharma.
Many others have also rewarded the investors with handsome returns. For the listings made up to the month of July 2021, only 3 companies have given negative returns. However, the trend seems to be reversing this month.
10 companies have been listed on the NSE in the month of August 2021 up until now. Of these only 3 are trading at premiums to their issue prices. All the others are trading at discounts. What has caused this sudden reversal in the sentiment? Let us analyze the factors -
Some could cite external reasons for this - falling grey market premiums, the RBI turning cautious on its accommodative stance, an impending third wave, and so on. Others also cite an ‘IPO fatigue’.
But there’s something more important that may be causing this new trend - the valuation.
When the IPO market is going strong, companies tend to exploit the sentiment by inflating values and raising more money with less stake dilution. Some companies might even move the entire listing idea ahead of time to make the most of market euphoria, bringing in a pre-mature IPO.
Even oversubscription figures are no indicator. Take the example of Windlas Biotech, which listed on 16-Aug. Windlas Biotech's ₹ 401.5 crore IPO comprised a fresh issue of ₹ 165 crores and an offer for sale worth ₹ 236.5 crores. The IPO was subscribed 22 times. It listed at a 5% discount to its issue price and currently trades at a discount of more than 26% (as of 25-Aug-21).
How can investors prevent making wrong IPO bets? Here are the indicators you should look out for when investing in an IPO -
The financials - Take a deep look at the trend in the financial health of the company. That includes the trend in revenues, profit margins, interest outgo, debt, and capital structure. It is also important to understand the cash flows trends of the business.
Purpose of raising money - It is important to understand the purpose of an IPO. Whether it is for repayment of debt, or for additional capex, or for inorganic expansion through mergers & amalgamations. The purpose of financing must be analyzed in light of the industry the company operates in, and the nature of its business.
While inorganic expansion may be an excellent reason for a company operating in a highly competitive niche, repayment of debt could be more relevant for someone experiencing a high interest outgo.
Quality of management - If one cannot trust the management of a company, there is no reason to trust the company’s business model or the strength of the sector it is operating in. A general background check of the management and promoters is essential.
Risk factors - There is a special section in the DRHP filings of IPO-bound companies that give the risk factors. It can give details around the sectoral and company-specific risks that investors must look out for.
Valuation - If you have to focus on just one aspect out of this list, let it be this one. As an investor, you must be absolutely sure of the price you are paying for ownership. The analysis must be well-rounded here - profits discounting, peer analysis, and P/E trend.
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Surbhi Singhal is a Chartered Accountant and a Company Secretary; and the founder of Advance Thinktank. The company specializes in preparing custom research reports regarding investment opportunities in India, tailored to the client's needs.