Are IPOs Worth Investing?

2021 was a landmark year for Initial Public Offerings (IPOs) in India. A record number of businesses were listed, and 2022 is expected to continue the IPO fever. However, are IPOs worth investing in, or is it all hype?

How have IPOs fared? Many IPOs listed in 2021 fared very well.

Here are some of the top IPOs listed:

• Zomato: The Zomato share price leapt by 53% against its issue price of Rs 76, which jumped to Rs 115 on the Bombay Stock Exchange (BSE) and Rs 116 on the National Stock Exchange (NSE).
• Nykaa: Nykaa saw a jump of over 79% above its issue price of Rs 1125. It got listed at Rs 2018 on the NSE and Rs 2001 on the BSE.
• MTAR Technologies: It saw a rise of 85% from its issue price of Rs 575. It was listed³ at Rs 1063.90 on the BSE and Rs 1050 on the NSE.
• Paras Defence and Space Technologies: This smaller-sized IPO had a staggering leap of 171% above its issue price of Rs 175. It got listed at Rs 475 on the BSE and Rs 469 on the NSE.

The Benefits of Investing in IPOs

• Listing gains

This is, undoubtedly, the main advantage of investing in IPOs. An IPO is perhaps your best bet at making a profit within a short timeframe.

• Liquidity

Once the company’s shares are listed, you can sell your shares on the market, allowing you to realise your gains quickly.

• Stringent norms

IPOs have stringent norms to follow. They must issue a prospectus listing detailed information about the business to help you make informed decisions before investing.

• Wealth-creating potential

Since you have been a part of the company from its early days, there is potential for you to profit well from the start and over time. This helps create wealth in the long run for you.

Here are some measures you should take to make the best IPO investment:

• Read the prospectus

Investors should read the Draft Red Herring Prospectus (DRHP) thoroughly to understand its past performance and plans.

• The ‘Why’ of an IPO

You should know why the IPO is being raised; is it only to pay off its debt or for expansion, or both? IPOs are meant to raise money for expansion, a dual purpose of expansion, or debt-payment, and potentially good investments.

• Growth factors:

Consider factors such as the company’s market share, geographical spread, expansion plans, and so on. These factors play a role in the growth and potential profit of the company.

• Financial factors:

Sound financials are crucial to an organisation’s long-term success. Review the company’s financials before investing in its IPO. If the IPO is considered overvalued, the share price may decline once it is listed. Look at similar companies that have been listed to infer if it has been fairly priced.

• Risk factors:

Pay attention to the risk factors mentioned in the DRHP as they can dampen its future growth, making the IPO a potentially unprofitable investment. IPOs can be highly beneficial to investors as their investment can grow by leaps and bounds, both overnight and in the long run. However, before you invest in an IPO, do your research well to make an intelligent and informed financial choice.

• Zomato was listed on 23 July 2021
• Nykaa was listed on 28 October 2021
• MTAR Technologies was listed on 3 March 2021
• Paras Defence and Space Technologies was listed on 21 September 2021