7 tips for 2024: How to maximise gains from IPO listings

If you have decided to go for listing gains, be sure to exit when the stock lists. It’s a good idea to take the gains on day one, and then re-evaluate the stock as any other traded stock thereafter.

An exciting year for stock market investors comes to an end. Circa 2023 logged the second-highest number of mainboard IPOs in over a decade, with over 57 Indian companies collectively raising Rs 49,000 crore.

From the look of it, the IPO frenzy is not showing any signs of dying down, as D-Street gears up for 2024 with a lineup of IPOs worth about Rs 60,000 crore. And if you are looking to ride the IPO wave in the year ahead, here are seven tips to participate in the IPO market profitably.

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These tips are useful for IPO traders.

Entering for listing gain? Think exit first.
First things first, be clear about whether you want to “participate” in an IPO because listing offer huge gains or “invest” in one for the long-haul. Looking to make a quick buck from new listings is not a bad idea, but all public issues do not qualify for this strategy. This strategy works when market momentum is very strong and the general narrative around the company is also positive.

Case in point, Tata Tech, IREDA, Gandhar Oil Refinery and Flair Writing. All listed at a premium between 50-150 percent when markets were scaling new highs in anticipation of BJP win in state assembly elections. Individual strengths like the trust of Tatas, the association with power segment, a market leader in stationery also helped in the big gains. At the same time, Fedbank, which many investors viewed as ‘just another NBFC’ listed at 2 percent discount.

If you have decided to go for listing gains, be sure to exit when the stock lists. It’s a good idea to take the gains on day one, and then re-evaluate the stock as any other traded stock thereafter.

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Track black, white and grey
Whichever IPO you are applying for, and even if you are looking at only short-term listing gains, read the offer document to understand the basics of the company. It’s financials, peer comparison, valuations, which are the pre-existing investors in the stock and so on.

You should have a general sense of a company’s business model and its financial soundness. Usually, there is hardly any “research” available on IPOs. You’ll hardly find analysts saying “sell” on an IPO, so the onus is on you to do the basic homework of knowing about the company’s business.

At the same time, as a “IPO trader” grey market premium is vitally important to track. Though not a very credible indicator, this gives investors’ a good idea about the kind of public anticipation for the IPO. But remember, there is nothing official about this.

If the market sentiment turns, these gains may not materialise. But this is a fairly good indicator of what is the going price like and therefore what could be the possible listing gains. You can check this information on Moenycontrol.com.

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Better your chances
If you are gunning for listing gains, in order to ensure allotment, focus on larger-sized issues. “Anything more than Rs 500 crore is a good issue size. Larger sized issues usually do not see frenzied bidding. They do not see 200x, 500x oversubscription. Thus, chances of getting an allotment are higher,” said Manish Khanna, director, SW India.

The second thing to remember is IPO allotment process for retail investors is done on a lottery basis in case of oversubscription. Not pro-rata, not first-come-first-serve but lottery. How do you then better your chances? Involve the whole family in the IPO tango. Multiple applications increase the chances of getting a piece of the IPO cake. “Investors can put one lot in the name of each of their family members which will help them better their chances in the event of oversubscription,” said Mahavir Lunawat, Managing Director, Pantomath Capital Advisors.

Also Read: IPO rally stays the course with Rs 60,000-cr share sales lined up for new year

Wait, till the last minute!
It’s hard to get your timing perfect in anything, and especially in stock markets. But you should certainly give yourself as much time as possible to get as much information and insight as possible to make a better decision. There might be some thrill in watching Oppenheimer first day, first show, but putting your application on the first day, first hour gives you nothing to brag about, nor does it make your extra money.

So wait, watch the demand on the first two days and put your application on the last day morning hours. This so that you get a good sense of the demand for the IPO and also the mood of the market. As markets get more volatile, a change in sentiment may spoil your listing gains. By cutting it closer to listing day, you make a more informed decision.

But don’t push it to closing hours on the last day because, with the newly reformed IPO timeline from T+6 to T+3, while the exchanges accept the IPO bids till 5 PM, brokers might stop accepting applications in the afternoon.

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Quality, price or both?
Most experts will tell you bid for only fundamentally strong companies which are priced attractively. That’s ideal, but the market does not make offers that easy. It’s a greedy world. The selling shareholders, promoters and private equity try to extract the best price for themselves. So you need to play your game strategically as well.

If an IPO is truly unique, offers a business that is not available in the listed universe, it will certainly have scarcity premium attached to it. It’s unlikely to be priced attractively. Buffett’s quote is important to recall here. “In the short-term, markets are a voting machine; in the long term they are weighing machine.” So if you are participating for short-term listing gains, you want the voting machine to work for you. Play that momentum. But be sure to not buy absolutely poor quality companies for they are simply not worth your time and attention.

You can compromise on valuations to a degree, if the company is sound but avoid issues which are priced absolutely out of sync with reality because they might turn sooner than you expect. Otherwise, remember, a stock can continue to be overvalued till the market fancies its unique position and allow you the chance to exit.

Also Read: Sectoral Scorecard: The winners and losers of 2023’s bull run

Use leverage judiciously
You can size up your positions by using leverage. But do not over-leverage. These days leverage costs are quite low, because you need to avail leverage only for five days. With low cost of leverage, the temptation may be to over-leverage, but remember even leverage costs keep eating into your returns and may end up amplifying your loss when you go wrong on an issue.

Go for Buffet, Not a Binge
Resist the temptation to binge on a single stock or sector. Also, as mentioned above, do not keep holding on your IPO allocation or loss-making IPOs if you are participating for short-term gains. Have a buffet approach by way of diversification, where you can savour a variety of opportunities with lower risk.

“Spread your IPO trades across different companies and industries to mitigate risk. Remember, even the most promising IPOs can falter, so diversification is key to protecting your portfolio,” said Amit Goel, Co-Founder and Chief Global Strategist at Pace 360. Keep moving from one IPO to another.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.