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Paytm, Mobikwik, Nykaa and others to list soon: Here’s how retail investors can pick the right IPOs

You may have a short-term view and invest a few thousands to get some cool listing gains. But real wealth is created when you invest in good companies and hold them for years

October 28, 2021 / 10:06 AM IST

If the mood of the Indian markets remains bullish for a few more months, then I am sure that 2021-22 will set a new record for the money raised in IPOs (initial public offers). There is a flood of IPOs slated for Oct-Dec 2021 and Jan-Mar 2022. Many of these are popular names: Paytm, PolicyBazaar, Star Health, Nykaa and MobiKwik. And if that wasn’t enough, then the big daddy LIC, too, will be here with its monster IPO – expected to exceed Rs 75,000 crore.

But the favourable conditions and the momentum of secondary markets aren’t the only factors in paving the way for these IPOs. The increased interest of first-time investors (armed with new stock-market apps) is also helping boost the confidence of IPO-bound companies.

I have often shared my views on IPO investing and why it’s better to just avoid them. IPOs may look like avenues for quick money. But by design, IPOs are always overpriced. And even though many recent IPOs have delivered stellar returns to investors, that is no guarantee for all future IPOs doing well.

You may have a short-term view and want to invest a few thousands to get some cool listing gains. But real wealth is created when you invest in good companies, hold them for years and allow your investment to compound by leaps and bounds.

The good, bad and the ugly of IPOs

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Not all IPOs are good. Some are priced on the basis of (for lack of better words) Price-To-Imagination ratios! But to be fair, some are good businesses. They offer unique, new-age or niche products/services with strong pedigree, financials and a visible runway for strong future growth.

So, to be fair, a few IPOs do provide an opportunity to invest in good businesses early. But how do you pick such IPOs from tons of available ones?

Picking the best IPOs

The task is not easy. There is a huge information asymmetry during IPOs. And since IPOs generally come in rising markets, there is a tendency to overlook the shortcomings of the company as people start looking at everything from the lens of easy money.

But if you are willing to put in some effort, then you can pick good IPOs and skip the really bad ones. Of course, you need to get an allotment too, which in itself has become very difficult these days. Nevertheless, here are a few broad points to keep in mind while looking at IPOs.

-Have you heard of the DRHP (draft red herring prospectus)? It’s a heavy, dense document filed by the companies before they float their IPOs. It has all the details about the company, the planned use of the IPO money, risks, etc. If you read this document carefully, you will get a very good idea about how good (or bad) the business is. But more than 99 percent of the people don’t read this document. If you want to make an informed decision, do give these DRHPs a look.

-Don’t invest in anything you don’t understand. Give some time to understand the business of the company coming with the IPO. And how it plans to use the money to grow its business (or repay debt, give an exit to early investors, etc.). If you are unable to understand what the company is all about and what it plans to do with the IPO money, stay away.

-Promoters: This is a real big factor. You need to have a close look at who is running the company and how these people are. Some shady ones come with IPOs just to get your money. Good ones want money to grow their business and also make wealth for shareholders. This is a very difficult factor to assess, but still important. And please don’t under-estimate the power of bad management. Most stocks that eventually go down 90-99 percent have bad managements. It’s like sitting in a car with a bad driver. Your luck won’t last for very long.

-Financial Strength & Peer Analysis: This requires no explanation. But you need to have some idea of how company finances are evaluated to benefit from this assessment. Also, do a comparison with other listed/unlisted companies in the same sector/industry to get an idea about what other similar options are available for you.

There may be many other factors. But this is how you can begin. By the way, grey market premium (or GMP) is not a factor that you should be looking to evaluate an IPO if you are investing for the long term.

I know the above points do look like a lot of work. But this is the right approach, irrespective of what you think. And that is the reason it is said that if you have doubts, avoid IPOs. Or be very selective.

If not IPOs, then what?

Keep it simple and stick to a portfolio of well-diversified equity funds. That is the most practical approach. And stick regularly to SIPs, which are your best investment bets. Investing a few thousands in IPOs just for excitement is still fine. But remember that it’s more important to invest the right amount to reach your financial goals rather than randomly investing small amounts in IPOs.



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Dev Ashish The writer is the founder of StableInvestor.com
first published: Oct 28, 2021 10:06 am
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