IPOs are subject to euphoria please read this whole article carefully (read in flash speed)
“Risk hai toh Ishq hai”, nope, we are not talking about how your valentines’ day went by, we are quoting a famous dialogue from Scam 1992: The Harshad Mehta Story, a Hindi crime drama web series. This article is not a review about the movie but the quote is the perfect start to this edition of our newsletter, “The IPO Rush”. You ask Why? More than 40 Initial Public Offering (IPOs) were issued in the calendar year 2020 as firms went in search to increase their equity exposure for their capital structure. And listing gains? Burger King made its debut on Dalal Street with an upside of 130%.
An IPO as the name suggests is a route wherein the company enters the stock market offering shares to the public. Most of these listed companies are privately held by their promoters. However, the promoters might have the urge to get public money, as they might not have adequate funds for setting up or running the business in the long term. Hence when you buy or get allotted shares in the primary market (IPOs) the money goes straight into the pockets of the company whereas when you buy shares in the Secondary market (on NSE/BSE for example), the money goes to someone who currently is owning those shares.
Have you previously burnt your fingers in IPOs? Don’t worry, this article will have you covered and you will most definitely leave learning the ABC’s of investing in IPOs.
You need to do some homework before you apply for an IPO and the best part is that all this information can be found under one roof, i.e., the Draft Red Herring Prospectus.
Let us walk you through the process of investing
The background of the promoters and the company is the FIRST thing that you need to study before investing. You really would not want to end up in another DHFL scam ;). There is a website which helps you check the default history of a promoter, www.watchoutinvestors.com.
Have a close eye on two things; first, the ‘why’. Why is the company opting for the IPO route to raise money? Second is the promoter’s stake. A low promoter stake shows a lesser commitment by the promoters.
How is the price of a share determined?
Let us have a look at a couple of methods investment bankers use to determine the valuation of any stock:
Price Earning (P/E) Ratio: One of the most loved ratios by the investors! This method is based on the concept that any share price is some multiple of the company’s profit per share. The P/E ratio is calculated by dividing the proposed price of the issue by the earnings per share (EPS).
Price to Book Value (P/BV): This valuation method is based on the concept that a share price is closer to the company’s book value. So, book value is the ratio obtained when you divide the company’s net assets by the total numbers of shares that the company wants to issue.
How to Apply?
You will need a Demat account to apply, and this can be easily made by any broker. You will have to fill in all your details, including your bank details, PAN number, the number of shares applied and in case of a bookbuild issue, the bid price. After all this, you need to wait for the allotment to happen and if the response is good, then there are high chances that when the stock lists, it would trade at a premium (provided you are the lucky one to own the first tranche of the shares). A good response to the issue results in a proportionate allotment. This proportion depends on the over-subscription, under each category. Categories include retail buyers, non-institutional and Qualified Institutional Buyers (QIB).
As of today, we follow the T+6-day system for listing shares, this means that from the closing day of an issue, the shares must get listed within 6 business days.
Now moving on to the probable IPO line up at the Dalal Street in 2021…
OYO: Own Your Own (OYO) rooms is currently the largest hotel chain in India and has a portfolio of over 1 million rooms globally and around 23,000 exclusive hotels spread across 800 cities. The hospitality sector has been one of the worst sectors to be affected by the pandemic because global and domestic travel had dropped to a mere trickle. Though, OYO is lucky to operate majorly in only 2 segments. The first one being economy hotels and the second being vacation homes. Founder and Group CEO Ritesh Agarwal has said that the company has around $1 billion to fund their operations until they launch IPO.
BYJU’s: India’s largest online education company with over 70 million registered users may go public in near future by listing itself not only in Indian stock exchanges but also in the US. Started 10 years back, this EdTech platform currently caters to students from the kindergarten section till the 12th standard. They also give training for various competitive entrance exams and are the current official sponsor of the Indian Cricket Team.
LIC: This zindigi ke sath bhi, zindigi ke baad bhi company is all set for a mega IPO launch this year, and the decision came from none other than the Finance Minister herself on the budget day. Yes, this is an IPO many retail investors are drooling on. This listing of India’s largest insurer is vital for the government of India to achieve its disinvestment goal of Rs 1.75 Lakh Crore for 2021-22. Are you a policyholder? LIC may then have positive news for you. The proposed changes to the LIC Act will allow 20 crore policyholders to take part in the IPO process as they will have a 10% reserved quota and not only this, you will be offered a discount of up to 10%
Zomato: Let’s talk about food delivery! If you have the Zomato App downloaded on your devices, you most definitely would have fallen in love with their cheesy marketing one-liners. But guess what? Zomato won’t just deliver food this year. They have set their eyes on a mega IPO launch. They will launch it in the first half of this year and are valuing the company at $6-8 billion. They have roped in Goldman Sachs, Kotak Mahindra Bank, Morgan Stanley, and Credit Suisse to kick start their IPO process.
We can go on and on with the names of the IPOs that are to launch in the next few years, but we don’t want to bore you. Have we missed out on your favourite IPO and you want us to help you out with it? Drop-in a message in the chat box and we will get back, surely.
Indian IPO investors have always been rewarded handsomely in the last year with some blockbuster IPO listing gains, and this is making many investors flock to the primary market. Many of the previous IPO issues have received love from all pockets of investors, and that is visible in the astronomical level of oversubscription, though there is always a catch!
Therefore, Soch kar, Samjh kar, Invest kar...