Good quality IPOs are great options for investors when considering investing in an IPO. However, IPOs should not be taken as money multiplier instruments and invested in. Multiple IPOs have performed badly due to extremely high valuations and poor financials. Hence, it is important to evaluate the financials of the company before investing in them.
The Indian IPO markets have been raging hot since last year as companies line up to cash out in the latest stock market boom. India witnessed record IPOs in the year 2020 as well as 2021 because of the ample liquidity in the market. Some of the key reasons behind the rush of IPOs are:
The extremely low-interest rates in the economy push corporate and businesses to borrow at a lower rate and expand. Similarly, the retail investors shunned traditional investment instruments like the Fixed Deposits (FD) or Government Bonds in order to look for better returns. The stock markets captured their attention as the benchmark Indices (Nifty) had delivered extraordinary returns in the last 12 months.
Because of these reasons, companies rushed to take advantage of the retail participation who were flush with liquidity. Almost all the issues in the past couple of years were highly oversubscribed due to the excessive demand.
As the liquidity-driven rally fueled the stock markets higher, more and more companies realized the opportunity and hopped on the IPO bandwagon. Investors, on the other hand, preferred IPOs compared to equity investing. The reason was, every second company provided extraordinary listing gains on the date of listing. This resulted in an IPO boom where every company which was waiting for a public issue, got an opportunity to cash out at a premium valuation.
Even if multiple IPOs generated triple-digit listing gains, not all of them are the same. Some IPOs got listed at a discount and investors did lose a substantial amount of their capital.
Before investing in an IPO there are some parameters which you should check. They are.
No matter how hyped an IPO is, ultimately investors should discount the financials of a company to ascertain its precise value. Multiple companies came out with insanely lofty valuations and failed to deliver adequate returns to their investors. Due to this reason, you should first match the valuation of the company with its share price to find out whether it is overvalued or undervalued.
Evaluating the industry of the company is important while valuing it with its peers. You should compare the valuation of the company with the peers of the same industry to come up with a judgment. Recently certain segments like the specialty chemical sector were in the limelight. This resulted in higher demands for these companies.
Therefore, to conclude, IPOs are a good way to begin your investing journey. But you should perform your due diligence and carry out your research on the valuations and pricing of a company before investing in an IPO.
You should also remember that the market condition also plays a major role in the listing of IPOs. If the broader trend of the markets is upwards, IPOs tend to list at a premium. Similarly, if the overall, market sentiment is negative, IPO also underperforms in such a scenario. The most effective strategy is to apply for IPOs of good companies and stay invested for the long term. This way, you are not looking for quick listing gains, rather you are looking at the big picture of investing in a fundamentally strong company. Therefore, it is critical to evaluate all the risks and rewards before investing in an IPO, and not look at them as a mere money-multiplying instrument.