Initial public offering (IPO) Investment


In this article we are taking the case of Indian stock Markets and relevant figures to highlight the optimism of the investors in an IPO. The past 2 years have seen numerous IPO that rode the Bull Run in the secondary market.

During the last 2 years there were 72 issues trading above the allotment price and some 53 issues traded below their allotment prices.

In the 12-month period between May 2005 and April 2006, a staggering 102 issues hit the capital markets but the last 3 months of the yearly period has seen only 7 public issues.

Investors are an optimistic lot. Every company’s Initial Public Offering (IPO) is welcomed with the undying hope that it may be the next Infosys (an IT company of India which excelled in stocks) and all those who spot it today will secure the future of their children and grandchildren. Unfortunately for every Infosys there are dozens of other peer companies wherein investors lost their hard earned money.

A look at ‘The Performers and the Laggards’ is enough to establish that once listed, companies are valued on the fundamentals of their businesses. Companies that have been able to trade at a premium to the allotment price are those whose businesses are niche but whose investors are broad-based and who have sound strategies that are being implemented by a capable management. Moreover, they are a part of certain growth sectors that are benefiting from the economic reform and liberalization that has and is continuing to take place.

In the past couple of weeks, we have witnessed a renewed bout of action in the primary markets.

To ensure that you do not burn your fingers, take into account the following factors before subscribing to any company’s IPO

1. Promoter standing:
Look into the promoters’ background, industry experience and the performance of the other companies promoted by them.

2. Company performance:
You must ensure that any company in which you invest has a track record of good operational performance, as a fundamental investor who looks at value creation through long-term investment, which is reflected in its numbers.

3. Future prospects:
It is imperative to keep the future prospects in mind while evaluating the company’s business.

4. The price:
Make sure that you compare the P/E of any issue with those of its peers.

Last word on IPO investment:

The past 2 years have been numerous IPO that rode the bull-run in the secondary market. In the next 2 years approximately 280 companies will be raising funds amounting to rupee equivalent of $ 22 billion through IPO. DLF, MCX and Oil India are some of the major companies that will soon enter the primary market. There will be fancier charts, crisper sound bytes and greater hype but a word of caution is, do everything in your power from investing in a dud stock. Before subscribing to any company’s IPO assess the promoter standing, company performance, future prospects and its price.