Demystifying IPOs– Part 1

Historically, we have seen that IPO markets get heated up as and when markets trade at record highs as investor participation tends to be higher in a bull run. With the IPO frenzy catching up once again, here’s everything you need to know in our two-part IPO series.

From idea to IPO…

As the saying goes, ek idea jo aapki duniya badal de. Say you turn your vision into a startup. Initially, it starts small with your own and family funding, probably a loan from a bank or so. Then it gets bigger and bigger. And even bigger. Until one day, you decide it’s time for your company to go public.

This is known as an initial public offer (IPO). As the business expands, businesses can raise more capital for growth by offering a piece of the company to the public!

IPOs offer the opportunity to spot quality companies early on. Think about any stock that has gone on to multiply investor wealth by a huge factor. How would it have been had you spotted that opportunity when the company went public with its IPO?

Behind the scenes

IPOs seem exciting from investors’ perspectives. Not all companies can pull off an IPO. Becausea lot goes behind the scenes into launching an IPO. Taking a company public is a long and cumbersome process. It requires access to specialized knowledge and is conducted in many phases. The process usually lasts for many months.Post the approvals from regulators, it’s finally good to go.

After the IPO process, it’s time to make a debut on the stock exchanges. But, is the first day of listing a reasonable or reliable predictor of a company?

Listing v/s long-term gains

The year 2019 gave some fantastic opportunities to make an early entry into businesses like IndiaMART InterMESH, Polycab India, IRCTC, among others. But then, there have been many small companies, which used to tap the capital markets and erode minority shareholders wealth.

We are not drawing parallels here to cause any panic. The point is that IPOs aren't always a win-win.A stellar IPO listing does not always reward investors over the long-term and we often observe that gains fizzle out over time when investors book profits.

Similarly, a stock that lists at discount to its issue price does not mean it lacks potential because stocks can recover losses in time and reward investors.This is evident from the table below:

IPO Performance - Listing day gainers

IPO Performance - Listing day losers

Stocks normally list at a premium during bull markets and often list at a discount in a poor market. Hence market conditions along with company’s fundamentals and valuations also plays a role in listing gains.

IPO fever - 2021

A healthy IPO market means a healthy environment for all business owners and entrepreneurs. So first, we wish all companies going public this year all the very best.

With the IPO frenzy catching up again, you too must be tempted to participate. Companies ranging from a wide array of sectors are going public this year includingthe mega Zomato, Glenmark Life, Shriram Properties, Rolex Ringhs, Seven Islands Shipping, among a few of the names.

So, what all parameters one should consider while investing in IPOs?

Find out in the next article here. Make sure you take an informed decision…

References:

CNBC TV 18

The Hindu Businessline