Each IPO will need to be evaluated on bottom-up basis irrespective of market sentiment to make money. Sharper scrutiny and greater long-term focus is required to make consistent money through IPOs.
Kotak Mutual Fund
This year (2017) has been a boom year for primary equity issuances. Aggregate money raised from investors through initial public offers (IPOs) nearly tripled in 2017 as compared to that in the previous year.
We witnessed nearly Rs 75,000 crore worth of IPOs in this year compared to about Rs 26,000 crore raised in the year 2016. Even IPO activity levels have significantly gone up during the year.
More than 150 companies came up with IPOs in 2017 as against about 100 companies in the previous year. However, the higher interest levels in primary market have not really resulted in uniform wealth creation across the issuances.
Nearly one-third of the companies listed in 2016, as well as 2017, have been trading below their IPO price levels. Only a half of the companies that went public in 2017 have outperformed the market since their respective issuances.
This clearly indicates that the risk in primary market issuances is not any lower compared to the equity market in general, and it also shows that investors need to approach IPOs on the stock-specific basis to earn better returns.
In case of IPOs, it is usually promoters and an initial set of investors who will be diluting their stakes. These are essentially the insiders who very well know the value of their businesses and are not generally expected to sell it cheap.
Both timing and pricing of the issuance is decided by these very insiders. Therefore, the odds are clearly against other investors in IPOs. From, this standpoint, retail investors should exercise utmost caution while evaluating investment worthiness of IPOs.
From the above analysis, it seems like retail investors have had mixed experience by investing through IPO route in the recent past. Due to this, we have also witnessed waning interest from retail investors to participate in some of the most recent IPOs.
However, HNI investors, especially those who leverage their application size in IPOs seem to have bet, by and large, on good set IPOs that listed at a decent premium to cover leverage cost.
This was visible as selective IPOs witnessed good interest from HNI category. If one gives cursory look at portfolios of institutional investors it is evident that most portfolios hold stocks from IPOs that have reasonably strong fundamentals.
So, all in all, each IPO will need to be evaluated on bottom-up basis irrespective of market sentiment to make money. Sharper scrutiny and greater long-term focus is required to make consistent money through IPOs.Disclaimer: The author is CIP-Equity, Kotak Mutual Fund. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.