The IPO Rush

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 mer