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Investing in IPOs just for listing gains? Here’s how you can plan your bets carefully

You need to allocate a certain part of your equity portfolio to a bouquet of five to seven select IPOs

September 29, 2021 / 10:54 AM IST

The primary market is doing well. Many companies are raising funds through the initial public offer (IPO) route and investors have the list of a few multi-bagger stocks in no time. Though many stocks have offered good listing gains, there are some that are struggling. What do you do if you get stuck with a poor IPO listing candidate?

Plan your trade

In a boom phase, market valuations are typically ahead of fundamentals. And many promoters would want offload stocks to investors at a good price.

Mohit Nigam, Head- PMS of Hem Securities says, “There is abundant liquidity and markets have done well. This is the best time to come out with an IPO. Avoid applying for every IPO as there are both good and poor-quality businesses on offer.”


The stocks of Suryoday Small Finance Bank were offered in IPO at Rs 305 a share. The stock listed at Rs 293 and was trading at around Rs 185 recently – down 39 percent from issue price. Shares of Kalyan Jewellers are quoting at 19.7 percent discount, at Rs 69.8, compared to issue price of Rs 87.

Though we are in a bull market, there will be stocks that fall. So, have an exit plan ready before you invest in an IPO. “Stick to your exit strategy when you invest in an IPO. If you invested only for listing gains, sell the stock a day or two after listing,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

Many investors do not sell when the IPO stock trades near the issue price. Even if your trade does not work as you envisaged, you should stick to your game plan. Exiting with a small loss could save you from a larger hit later on.

Not all investments work

When you invest in a risky asset class, there are many company-specific and macroeconomic factors at work. They influence stock prices. Hemang Jani, Head- Equities of Motilal Oswal Financial Services says, “Not all stocks or IPOs you have invested in will work out the way you envisaged. Hence, you have to allocate a certain part of your equity portfolio to a bouquet of five to seven select IPOs.” Jani prefers investments in IPOs of information technology and specialty chemical companies.

“To make money in an IPO, choose stocks which are backed by sustainable business models, are fundamentally good and ask for digestible valuations,” says Nigam. Stocks of fundamentally poor companies quoting below their issue prices in the current bull-run are unlikely to do well in the future. You have to be stock specific to make money, he adds.

Analyse and act

Sometimes investors apply for an IPO in a hurry. But when the stock disappoints after listing and the prices start falling, they find it difficult to hold on. “Figure out why the stock price is declining. Is it because the business performance is not up to the mark or is it because of high valuations? If you are a long-term investor, then you should evaluate if better quality businesses among already listed stocks are quoting at lower valuations than a recently listed stock you hold,” says Jani.

Adding on

It is better to err on the side of caution in a bull market. If a stock doesn’t deliver even in a bullish market, then there may be something wrong with it.

But savvy investors can take a different path if they are convinced about the fundamentals. “If you have decided to invest in an IPO for the long term, after conducting thorough due diligence, then do not hesitate to buy more of the stock if it starts trading lower after listing."

There are stocks fell on listing day, but rewarded investors later. Macrotech Developers offered shares at Rs 486 per share. The stock listed at Rs 439. Later, it rose sharply to Rs 1062 per share. Craftsman Automation is another example. The stock listed at Rs 1,350 compared to the issue price of Rs 1,490. However, it subsequently rose to Rs 2116.

Many investors jump into an IPO purely looking at oversubscription levels and grey market premium (GMP) numbers. In a bull market, most IPOs are over-subscribed many times and GMP is not reliable. Along with business fundamentals and valuations it pays to check for institutional interest in the stock. If the QIB (qualified institutional buyer) quota is oversubscribed many times more than the residential institutional investors bid, then keep such stocks on your radar, if they quote below issue price post listing. Such stocks may recover later. Incidentally, both Macrotech and Craftsman had seen more institutional interest than retail investors at the time of their IPOs.
Nikhil Walavalkar
first published: Sep 29, 2021 09:29 am
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