The recent success of HDFC AMC listing on the stock exchanges at over 65 percent premium, had left the IPO markets ablaze. With close to 32 more companies receiving permissions from the Securities and Exchange Board of India (SEBI) for initial public offerings (IPO), investors will once again be hopeful of making enormous profits.
2018 has been a good year for IPOs, raising over Rs 800 crore up till now. Here are some things to note and understand before venturing into a company's IPO launch.
Only about 55% have been listed with positive gains
Out of the 52 companies listed on stock exchanges after their IPOs, only 29 gave positive returns to investors with a higher than issue price listing.
Some of these have seen more than 50 percent increase in their share price, the most noticeable being Avenue Supermart (D'Mart's owner) that has risen over 444 percent from its listing price of Rs 299 in March 2017 to Rs 1,591 on 10 August 2018. Other rewarders include Bandhan Bank, HDFC Standard Life, CDSL, ICICI Lombard General Insurance, Lemon Tree Hotels, and Shankara Building Products.
On the downside, 23 company shares are listed below their issue price, the biggest loser being CL Educate that was issued at Rs 502 on 31 March 2017 and was last trading at Rs 175 on 10 August 2018. An over 65 percent drop.
Some other companies that lost investors their money include ICICI Securities, HAL, SBI Life Insurance and Matrimony.com.
Do you want to book listing gains or are you in it for the long run?
Not all those that trading lower now were listed lower and not all that got listed lower did not gain later. For example, PSP Projects' was listed lower than issue price but is now trading above it. On the other hand, Apollo Micro Systems' has been trading 40 percent lower than issue price despite being listed at 69 percent premium on the first day at the stock market.
You need to decide if you are there only for the one day gain or as a long-term investor.
Chase quality stocks not listing gains
Many people look at IPOs as a route to make big gains in the stock market, but it is important to note that after the IPO, the stock will be listed like any other ordinary stock. The gains you make then will depend on the factors that affect all company stocks.
Therefore, take effort to understand the company, the factors that will affect the company's line of business and how the qualified institutional buyers (QIBs) invest before you take a call. Focus on buying a quality stock for investment growth.
Remember that you can also gain from an already listed company in the secondary market and IPO is not the only route. You can buy the stocks of the newly listed company even after IPO offer.
The major Indian stock market indices, that is Sensex and Nifty, may be on the rise with Sensex crossing 38,000-mark for the first time, but the mid and small-cap indices have been hurt largely, falling roughly over 8 percent and 12 percent respectively. One should note that the IPOs are largely listed in these sections that are currently facing heavy corrections in valuations.
This has also created a pricing pressure on companies planning to launch their IPOs. These factors could benefit investors in upcoming IPOs who could gain later when mid and small caps starting gaining.
Before you plan on investing in an IPO, always compare the issue price with that of an already listed company in the same business line. If the business is one of a kind in India, you can look at their global peers.