The number of Initial Public Offerings (IPOs) have shown impressive growth in 2016 with 83 companies tapping the market to raise US $3.8 bn driven by high investor confidence and regulatory reforms. In 2017, the primary market is quite alive with several insurance and logistics players in the fray. Over 50 companies are expected to raise over Rs 400-600 bn to beat the previous high of 84 companies raising Rs 410 bn in 2007-08.
Corporate Ethos talked to experts to find out their views on investing in IPOs- Krishnan Thampi, Sr Vice President, Research & Advisory at Hedge Equities, Sanil Kumar, Associate Director of Geojit Financial Services Ltd and Akshay Agarwal, Managing Director, Acumen Capital Markets Ltd.
#Is investing in IPO’s a wise strategy for an investor in terms of portfolio growth?
Krishnan Thampi: There is nothing wrong in considering IPO investing as a strategy for portfolio growth, but provided the IPO you select should be have the potential for the long-term growth.
Sanil Kumar: It depends on the stock specific valuation and pricing majorly. Good issues and attractively priced issues could be subscribed for, though allotment depends on the category-wise demand and %-age reserved.
Akshay Agarwal: On an average, it is good. But it depends a lot on various factors, the most important being the quality & valuation of the company when compared to other companies in the same industry. Market conditions also play an important role as in good markets most companies list at premiums. But, in the final analysis, and thinking long term, it’s the quality of the company and the valuation that matter
# Of the present bunch of IPO’s/Offer for Sale -HDFC Standard Life, Khadim, New India Assurance… which are the most attractive?
Krishnan Thampi: Considering different factors Khadim is better positioned.
Sanil Kumar: We have a subscribe recommendation on New India Assurance and HDFC Standard Life with a long term investment view.
Akshay Agarwal: Among the three, Khadim India looks good for subscription, as it is form a sunrise sector. India’s changing lifestyle and increasing income will work to their advantage.
While the other two are quality companies and may list at a premium if the markets continue to be good, they look expensive.
HDFC Standard Life Price to Book Value at Issue price at over 15, (SBI, and ICICI Pru are at a P/BV of 12 & 9 respectively) They also have a lower market share of 12.7 % compared to SBI 20.7 % and ICICI 22.30 %.
New India Assurance IPO also is highly priced with P/E of 78 times at its higher price band.
# What are the factors to be kept in mind when deciding to invest in an IPO?
Krishnan Thampi: First the quality of the company in terms of business and fundamentals and then the valuation, If an IPO of fundamentally good company with a fair pricing then there is higher possibility of getting a decent listing gain as well as long term growth.
Sanil Kumar: As mentioned earlier, valuation and pricing are very important parameters. Apart from that factors such as the Company’s Management, Market share among competitors, scalability of revenues, could be relevant as an investor.
Akshay Agarwal: Comparison of Profit Margins and Price earnings ratios will give us a clear idea whether the issue is overpriced. It will also be good to check are listing and post listing performance of the previous IPO’s in the same industry.
Issues coming with high price earnings ratios should be generally subscribed for listing gains only.
#If an IPO starts trading at a discount soon on listing, is it wise to hold on the scrip?
Krishnan Thampi: Again, its depends on the quality of the stock and the valuation, if the stock is fundamentally good and valuations are fair then one could hold.
Sanil Kumar: Applying or investing for an IPO with the objective of ‘listing day’ gain is very speculative and there are multiple forces that can influence the price movement. Good stories will always be cherished by the markets in the long run. On the contrary highly priced issues or those with lesser fundamental credits tend to remain low for months or years together. Hence a careful analysis would always help.
Akshay Agarwal: It depends on the subscriber’s outlook actually. Two types of people subscribe to IPO’s – Traders looking for listing gains or long term investors investing for the long term. Traders can book on listing gains or exit if trades at discount and Investors are there for long term and so should not look for listing gains . Investors can add the scrip once the scrip comes to undervalued levels of if any technical breakout comes in the charts.