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Investing in IPO? Check these key factors before putting your money

Nearly half of the 87 companies that were listed this year are trading below their issue prices. Let's delve into the green and red flags that investors must keep in mind before applying for an IPO

IPOs | Valuations | Retail investors

Nikita Vashisht  |  New Delhi 

The IPO market is crammed with companies looking to raise funds. After Zomato, Paytm and Nykaa, bigwigs like Delhivery, Mobikwik, Adani Wilmar, Keventer Agro, LIC, PharmEasy and Go Airlines are set to hit the market over the next six months. While 87 companies have already mopped up over Rs 72,000 crore so far in calendar year 2021, which is a record in itself, the tally is expected to hit Rs 1 trillion by the end of this year. This is in contrast to just around Rs 18,500 crore raised in the corresponding 10 months last year. However, all is not well in the primary market. An analysis by CARE Ratings shows that around 40 per cent issues are trading below their prices while only 23 per cent are trading 100 per cent above their issue prices. Overall, around half have given returns of above 10 per cent so far. Dig a bit deeper and you will see that failure rate or proportion of issues that are quoting lower than the issue price, is the highest among the issues with offer sizes either more than Rs 1,000 crore or less than Rs 10 crore. At the Rs 1,000 crore plus level, 40 per cent issues are quoting at a discount while 61 per cent issues are trading lower than their issue price in the lowest range category. The Rs 500-1,000 crore category has the lowest failure rate of just 1 in 13.

It is 27 per cent for the Rs 100-500 group and 40 per cent for the Rs 10-100 category. So how can investors steer clear of weak public offers and pick the best ones? Sameer Kaul, who is managing director and chief executive officer of TrustPlutus Wealth, said: Keep a track of…

  • Nature of the business
  • Quality of management
  • Valuation
For retail investors, Juzer Gabajiwala, director of Ventura Securities, suggested these for investment in an IPO:
  • Don't apply for more than the application amount
  • Check grey market premium
  • Check promoter background
  • Purpose and type of issue
That said, while these factors can help judge traditional businesses very well, they may not be entirely suitable for new-age businesses. For instance, Zomato's pricing was widely cited as very expensive and how it might not sustain. Similarly, Paytm's are under scanner and so were Nykaa's. Then, how should one judge public offers of these tech-based companies before investing? Is valuation really a concern for them? On new-age businesses, TrustPlutus’ Sameer Kaul said:
  • Traditional valuation methods don't work for new-age biz
  • Huge client data, cross-selling opportunity makes a case for sustained valuation
In a nutshell, while a bull run will give investors ample investment opportunities to earn money, long-term gains from an IPO will be generated based on the individual company's growth outlook, target market, management quality and financial stability. Now, coming to Wednesday's session, may continue to consolidate in today's session amid lack of fresh triggers. September quarter earnings will drive the secondary market action while initial public offers of Paytm, Sapphire Foods, and Latent View Analytics will also be on investor radar. Shares of Nykaa will debut on the bourses today. The counter is commanding a strong grey market premium, suggesting a solid pop. Globally, market participants will eye October inflation data of China and the US, slated to be released later in the day.

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First Published: Wed, November 10 2021. 08:45 IST