Are IPOs an Attractive Investment in Today's Scenario?

Last Updated: 13th September 2019 - 03:30 am

Even without looking at numbers you know that the first half of 2019 has not been great for the IPO market. The appetite for IPOs is a function of the secondary markets and the secondary markets have been just too volatile. This has led to limited appetite for IPOs in the first half of 2019.

Data Source: Prime Database

To make the data more comparable, we have considered only the IPO collections in the first half of each year. Between 2015 and 2018, the IPO collections in the first half of the year were on a steady uptrend. However, that uptrend was arrested in 2019 to about a third of the corresponding figure in 2018. This is explained by 5 broad factors.

Weakness in the mid-caps and small caps since mid-2018 was largely responsible since most of the IPOs were from that space and wary of valuations.
Stock market volatility is another reason and most issuers and institutional investors are not comfortable with IPOs at a time of rising volatility.
There have been deep cuts in favoured sectors like automobiles, auto ancillaries, mid-cap IT, steel, PSU banks, downstream oil, NBFCs etc and that hit retail appetite.
With NBFCs in a cash crunch and relatively higher cost of funds, the IPO funding market has not been too robust in the last one year. That impacted IPO demand.
Issuers were also wary of IPOs as they were worried that valuations may not be too attractive and they preferred to wait.

Is this a good time to invest in IPOs?

If you buy shares online, then you would know that you can also buy IPOs online. But, should you really invest in IPOs at this point? To answer this question, let us look at the performance of IPOs in 2019.

Number	Company name	Issue Price	CMP as on September 8, 2019	Returns (%)
1	Sterling & Wilson Solar Limited	780	576	-26.15%
2	Spandana Sphoorty Financial	856	888	3.74%
3	Affle India Limited	745	842	13.03%
4	IndiaMART InterMESH Limited	973	1,585	62.90%
5	Neogen Chemicals Limited	215	319	48.14%
6	Polycab India Limited	538	622	15.70%
7	Metropolis Healthcare Limited	880	1,305	48.32%
8	Rail Vikas Nigam Limited	19	25	31.05%
9	MSTC Limited	120	86	-28.17%
10	Chalet Hotels Limited	280	308	10.00%
11	Xelpmoc Design and Tech Limited	66	72	9.39%

The above table will come as a real surprise for you. Out of all the book built issues during the year that are already listed, almost all are trading at a premium to their IPO price. Of course, India Mart is the clear outperformer in the list. However, barring Sterling and MSTC all the other latest IPOs are currently quoting at a premium to their issue price. That is the best first first-half of any year if you look at the success rate.

What explains such an outperformance by IPOs in 2019? Firstly, PSU IPOs were absent in the market, and companies had a better chance in the absence of overcrowding. Secondly, tough markets forces companies to be a lot more conservative in pricing their IPOs. Thirdly, the tough market conditions mean that only issuers and investment bankers with confidence have approached the market.

Guide for IPO Investors – 6 things to remember

There are some important takeaways for IPO investors in the current investment scenario. Here are the key learnings.

Be wary of the pricing. This is a tough market and this is not the market to pay top dollars for IPOs.
Good quality IPOs, like good quality secondary market stocks, will always give you positive returns over the long run. Stick to quality.
Be wary of total Offers for Sale. The markets have, in the past, been slightly sceptical of OFS issues as it leads to promoters/anchor investors taking an exit.
Focus on management quality because the markets are currently very cautious about corporate governance issues. Prefer reputed names for IPO investments.
Look at sector benchmarks. If the company you are investing is quoting at valuation metrics that is divergent to the industry average, then you need to pause and think.
Avoid IPOs where capital dilution is very high. They will find it hard to create value.

Tough markets are an opportunity for the quality companies to thrive. Investors can access quality IPOs at reasonable prices. Who cares about euphoria anyways?

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