This is milestone week for India's primary market, with seven initial public offerings (IPOs) poised to raise over Rs 30,000 crore.
Leading the charge is Tata Capital's Rs 15,512-crore IPO, the largest ever by a non-banking finance company (NBFC) in the country. It has fixed a price band of Rs 310–326 a share for the offer, which will be open for subscription from October 6–8. LG Electronics India is looking to raise Rs 11,607-crore from the offer which will be available from October 7–9.
Pharmaceutical player Rubicon Research follows on October 9 with a Rs 1,377.50-crore offering. Canara Robeco Asset Management Company will launch its issue the same day, while Canara HSBC Life Insurance Company rounds out the main board segment with its IPO opening on October 10.
This flurry of activity underscores growing investor appetite amid a robust economic backdrop, but it also raises questions about valuation and sustainability.
Not all IPOs deliver premium listings
IPO euphoria doesn't always translate to gains. Glottis, for instance, had a weak debut on October 7, listing at Rs 84 on the NSE, a 34.88 percent discount to the issue price of Rs 120-129. Similarly, BMW Ventures Ltd and Arisinfra Solutions Ltd, which also listed this year, are trading at 31 percent and 29 percent discounts to their issue prices. Volatility is inherent in new listings and market sentiment can quickly sour.
Key factors to watch while selecting the right IPO
When evaluating these opportunities, investors should prioritise fundamentals over hype. Assess the company's business model, promoter credibility, and industry growth potential. A simple online search can reveal the promoters' track record, while scrutinising sector prospects helps avoid fear-of-missing-out (FOMO) traps. Equally vital is understanding how proceeds will be used — whether for expansion, debt reduction, or promoter exits.
Management quality and competitive positioning also play crucial roles. As Lt Col Rochak Bakshi, Founder of True North Finance, advises, "Price is what you pay and value is what you get." Comparing valuations with peers ensures you're not overpaying for potential. Fundamentals like these should overshadow grey market premiums, which can be misleading.
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Decoding financial ratios for smarter decisions
Financial metrics provide a clear lens into a company's health. Focus on the price-to-earnings (P/E) ratio to gauge if the offering is reasonably priced against industry standards. Return on equity (ROE) and return on capital employed (ROCE) reveal how efficiently funds are utilised, while the debt-to-equity ratio flags leverage risks a high figure could signal financial strain.
Earnings per share (EPS) tracks profitability trends, and net profit margins indicate operational efficiency. Revenue growth patterns offer insights into sustainability. Shivam Pathak, a certified financial planner and founder of Asset Elixir, said Check profit margins and revenue growth to judge if earnings are strong and sustainable, he said.
Review pre-IPO placements in the draft red herring prospectus (DRHP). “Avoid issues in which the difference between the latest pre-placement rate and the price at which the issue is being offered is very high,” Bakshi said. The stark difference between recent funding rounds and the issue price might indicate overvaluation.
Navigating the IPO prospectus
The prospectus serves as a comprehensive roadmap. Dive into management discussions for strategic insights, risk factors for potential pitfalls, and use of proceeds to confirm growth-oriented plans. Promoter shareholding and pending litigations can uncover governance issues. “If most funds go to debt repayment or promoter exit — it’s not a growth story, it’s a cash-out,” said Kirang Gandhi, a Pune-based financial mentor.
SEBI mandates disclosure of major transactions impacting capital structure, so cross-check these for transparency. The IPO prospectus demystifies the narrative, separating solid opportunities from speculative ones.
Avoiding pitfalls in IPO investing
Common errors include succumbing to oversubscription buzz or chasing short-term listing gains without due diligence. Ignoring valuations, financial stability, or personal risk tolerance can lead to regret. Many rely solely on grey market premiums for flipping strategies, but these can be manipulated, resulting in post-listing losses.
Herd mentality often overrides analysis. Investors hold on to underperformers due to biases, amplifying setbacks. Patience and independent research are key. "IPOs reward patience, not herd mentality the crowd exits when wisdom begins," Gandhi said. Tailor choices to your portfolio, avoiding the trap of applying to every issue.
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The dangers of leveraging loans for IPOs
Borrowing to fund IPO applications heightens risks significantly. “Allotment isn't guaranteed, and even premium listings might not offset interest costs. Market swings post-listing can erode gains or deepen losses, leaving borrowers with repayment obligations amid volatility,” Pathak said.
Bakshi said, "Many IPOs list below offer price, compounding losses when leverage is involved." Stick to surplus funds to prevent turning investments into burdensome debts.
Long-term wisdom amid the rush
IPOs are entry points into businesses, not quick flips. Respect market cycles, drawing lessons from past bubbles where hyped stocks fizzled while quality ones endured. Conduct thorough homework, blending expert insights with personal judgment, to navigate this week's unprecedented IPO activity wisely. Informed decisions could yield lasting value beyond the initial buzz.
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