Dear reader, if you haven’t realised by now from the past pattern, we are in an IPO rush. And not an ordinary one, because about 28 companies have completed their initial public offerings in the past 7 months, and more than 50 companies are waiting for their turn to come. If that wasn’t explanation enough, add to it the 34 companies that have filed offer paper. Do you see where we are heading with this? Well, while you may be able to contemplate on the where, the real question is, why? What does this apparent haste to get the companies listed imply? Let’s go into detail and find the answers to these questions.
A surge in the primary market activity-
At the very basic, there’s no denying that primary market activity in recent months has heightened. The primary reasons for this rise can be accounted to increased liquidity in the economy thanks to the loosened monetary policies by the central bank to induce growth, equity gains over the past year, record-high trading indices, and growing significance of financial literacy in the Indian economy. While these have been contributory to the growth witnessed in the primary market, it’s a little difficult to interpret them in terms of the INR 42,000 crore raised in the past few months by the 28 companies that completed their Initial Public offerings.
This significance is quickly being followed by the 34 other companies that are partially on their way to concluding their IPOs, joining the above 28 as they get their approval from the country’s securities regulatory body, SEBI. I’m sure your feed has also been flooded with the other big companies like PhonePe, MobiKwik, Grofers, and others that plan to get listed this year, with the number reaching over 50. A steady peek at the opening of these concluded IPOs present a picture of huge subscription and very gigantic listing gains.
It is not new information that the rise of financial literacy in the country has surged and this is reflected in the upward trend in the number of Demat accounts in the past few months. And while this IPO rush seems exciting and the fear of missing out takes over rational judgement at times, experts suggest against getting swayed with this IPO boom.
Why this sudden fixation on IPOs when the secondary market is also bringing in a good number?
IPOs in recent times have proven to be a source of quick money. After all, they’ve doubled the investor money in a rather quick fashion, haven’t they? Case in point- the Zomato offering, which opened for a subscription on July 14 and nearly doubled investor money in less than 10 days of it getting listed on July 23. And it’s not like Zomato was an unusual case, despite the huge hype that it had generated. Over the 26 listed companies thus far in the calendar year, 6 companies are trading with gains of over 100 per cent, i.e. double the investor money, on their offer price.
But, the real attracting incidence for the primary markets is not these hefty returns, but rather the almost certain high returns witnessed currently in the market. This originates from the fact of the 26 companies that concluded their listing, only 3 are trading below their offer price. Therefore, even though a number of companies in the secondary markets have fetched high returns over the past period, the almost certain high yields of the primary markets have become a dramatically important selling point.
Why dramatic? Well, the overwhelming numbers of investor accounts are corroborative of just that. In January 2020, the number of investor records with the Central Depository Services Limited remained at 2.01 crore; in the course of the most recent 17 months, it almost multiplied to 3.96 crore accounts by June 30, 2021. To be more precise, in the course of the most recent half a year since December, with 2.89 crore accounts, Central Depository Services Limited has added 1.07 crore accounts.
While this investment boom is a good sign for the economy, it can be undeniably said a large part in this account creation is being played by the benefits reaped by this IPO burst, and of course the gains in the secondary market. While financial literacy is going to be a good move for the country, there are some factors that investors should take into consideration.
How should your portfolio look like during this IPO rush?
Experts suggest creating a diversified portfolio at the point. This diversification comes in terms of growth-oriented blue-chip stocks, and medium-sized potential businesses with strong company fundamentals. Blue-chip stocks are the companies that have a large market capitalisation and a successful name in their industry.
Therefore, a good quality IPO can and definitely should be a part of your portfolio, but not only for the listing gains. Good companies can add a lot of value to your portfolio in the longer term. So, while a large number of retail investors do not get shares allotted during the IPO process, you can be a part of the entity after its listing, once you check the financials and are satisfied with it. The point of this conversation is to transfer some focus of the primary market investors from this IPO rush to the value addition these companies can do to your portfolios in the medium and long run.
What do experts suggest? Some key tips and advice-
One of the most common questions that always stick around is during the time you plan to invest in a traditional business. Well, the thing about this is, you have a lot of credible information sources and experience analogies present. Look at an already existing peer in the sector for review, and conclude what you want to do then.
In the case of new-age companies, however, with no significant precedents to back on, the investment doubts start persisting. The hefty oversubscriptions of Zomato are a sign that even though the entity may be loss making in the present, the real bet is on its profitability in the future and growth making capabilities of the future. While the choice of being bullish on it is an individual choice, the purpose of this argument is to draw attention to where the investor focus really is.
Therefore, experts suggest a varied approach for these new sets of companies. Since market share, revenue capabilities, and profit penetration are a thing of the future, one key index that can allow you to make a feasible judgement in the area is the ease of entry into the industry. If it is easier for competition to make their place in the market, it would be harder for companies to acquire a higher market share. The online fantasy gaming industry of the country presents a good example for it.
As experts suggest, “Tech companies or start-ups need to be evaluated beyond the traditional basics, with criterion like their business opportunity reach and if the entry barrier in the industry is too low.” Therefore, even though the IPO boom has been profitable for the investors in terms of listing gains, it is highly advisable that long term value addition be your eventual goal.
Markets are a plethora of opportunities and gains; you just have to be wise enough to make the right decisions. Don’t rush into anything, and trust your gut. In the words of CEO and CIO of InCred Asset management, Mrinal Singh, “IPOs are seen as money-raising tools, and companies get eager to have their their public issue when there is high liquidity in the market.
This IPO boom during periods of high liquidity leads to elevated price discovery, and the empirical evidences based on past performance show that only half the companies are able to fulfill and stay true to the expectations that get built up from them. So, I would say that retail investors should be very cautious while investing in IPOs and valuation sanity is a key.” Happy earning!
Edited by Tanish Sachdev