When we think to Invest in IPO the thought strike us of making fortunes with the successful IPO’s of companies like Infosys, Reliance industries, Tata all the blue chips. But the demons of Reliance Power still haunts us. So what should retail investors like us do?
IPO a dream for share trader
Let us understand the process and reasons for IPO (Intial Public Offering) and FPO (Follow-On Public Offering). Why do companies issue stocks to Public?
- To raise additional capital for expansion and growth.
- To get additional capital for liquidity.
- To raise capital for research and development.
- To pay-off their existing debt.
- To liquidate the stake of its Promoters.
- To increase public awareness about the company through IPO.
SEBI( Securities Exchange Board of India) lays down certain criteria before listing of companies shares like Net tangible assets of at least 3crores for full 3 years and distributional profit for 3years and the list goes on.
But the IPO investments remain a risky bet as there is very limited historical data about the company issuing the stock is available. This makes decision making difficult. The red herring prospectus has to be taken as the Bible for the IPO of that company. Gone are the days when government body use to fix the Issue price with the abolishment of Controller of Capital Issue in 1992. This would give good issue price to the investors. It has been observed that more gains have been made by offloading the share immediately post listing with the success rate of 70%. The year 2013 has been worst year for IPO in 12 years.
So should investors dare to invest in the IPO?
Let us analyze few scenarios to get clear picture.
Infosys Limited – One of the best IPO’s issued in the year 1993 at the price of Rs95. It was undersubscribed but Morgan Stanely bails it out by picking 13% of its stake. As per SEBI rule IPO should be atleast 90% subscribed to get listed otherwise all the subscription money should be refunded. It’s listing opened at Rs 145 with the premium of 60 percent. The share price moved to Rs. 8100 in 1999 costliest share in the market which is multiplied 85 times. And all the bonus, dividend, splits followed. There was no looking back since then.
Reliance Power – It was fully subscribed in the very first minute of its opening. But on listing the price fell almost 17% of its issue price. Rest you know about it.
Hindustan Copper Ltd. – It had issued a FPO which opened at Rs. 155 with a heavy discount on it’s market price of Rs.266 which in no time pull the price down to Rs. 155 and the C.M.P is below 100 with a 52 week high of Rs. 125.
By looking at above three cases we can conclude that the IPO investment should be made with proper research same as how you invest in the Secondary Market i.e already listed shares.
- To understand the nature of the business.
- The revenue generation of the company.
- The reasons for issuing IPO.
- Background of the Promoters.
- Discount on Issue price.
- Subscription of QIB (Qualified Institutional Buyers)
- The Underwriter Involved in the Issue.
- Peer group comparison of the IPO company.
- Sector analysis if you are looking for short term gains.
- IPO grades by registered Credit Rating Agencies with SEBI.
In the case of Infosys it had strong business fundamentals and good Corporate governance under the leadership of Mr. Narayan Murthy and his excellent associates. Reliance Power the listing of the stock had happened in January 2008 when the market bearish phase had just started. It was going to develop 6 power project across India with the subscription money. In which the revenue generation would take long time. Till that it was just a virtual entity. Investor should not get deceive by discount as it happened in case of Hindustan Copper and neglect your research. As discount is on quality and not on price.
Currently a bull phase is goin on and it’s the season for IPOs to hit the streets. So the investors must do their ground work before getting into an IPO. As it is not a rocket science to understand the nature of business and future profitability of the company issuing the IPO. This will help you to find good stocks like Infosys. You will not have to worry to get out of the stock immediately to get listing gains.