Should You Join The IPO Rush? India logged the most number of IPOs this year till September, according to a study. With several more IPOs expected in the next few months, experts advise public to factor in some key considerations before shelling out their money

What do companies such as IdeaForgeTech, Mankind Pharma, Utkarsh Small Finance Bank and Honasa, the parent company of Mamaearth have in common? No they are not in the same line of business. Their business models are apart. But one thing that binds them is the fact that they have all raised capital by going public this year.

With 149 listings, India logged the most number of IPOs this year till September, according to a study by EY. In comparison, there were 144 IPOs by Indian companies during the whole of 2022, which included listing by large as well small and medium enterprises (SME).

The September quarter of 2023 saw a staggering 21 IPOs on the main platforms of the bourses, compared to just four in the same quarter of 2022. The proceeds raised during the quarter by these companies amounted to $1.7 billion, an increase of 376% from $372 million in the year-ago period, EY said. The small and medium enterprises (SME) segment also recorded significant success by raising US$ 165.76 million via 48 IPOs in Q3 2023.

If one looks at the overall response from the public to these IPOs, it has been good. It got further buoyed by strong listing performance. Average listing gain increased to 29.44 per cent, in comparison to 11.56 per cent in the first half of 2022- 23. Of the 28 IPOs which have got listed thus far, 20 gave a return of over 10 per cent. Ideaforge gave a stupendous return of 93 per cent followed by Utkarsh Small Finance Bank (92 per cent) and Netweb Technologies (82 per cent).

More recently Tata Technology made a stellar debut with its IPO. It listed at INR 1,200 per share on NSE, which is a whopping 140% higher than the issue price of INR 500. On BSE, it listed at INR 1,199.95 per share. "Response from investor's frenzied IPO participation with healthy listing premium & entrepreneurs getting their valuations unlocking significant value has worked as a win-win till now," says Dennis Gabriel, Partner, Upwisery.

BFSI a laggard

Till September, manufacturing sector accounted for the highest share of IPOs, followed by the capital intensive sector. BFSI was a laggard with just 2 IPOs and raising just INR 1,525 crore (or 6 per cent) being raised by companies from this sector (in comparison to 61 per cent in the same period last year).

Momentum to continue

According to a report by Prime Database, the positive trend of IPOs is expected to continue. As many as 28 companies proposing to raise INR 38,000 crore are presently holding SEBI approval while another 41 companies looking to raise about INR 44,000 crore are awaiting SEBI approval (Out of these 69 companies, 3 are NATCs which are looking to raise roughly INR 12,000 crore).

The next 4-5 months are likely to see several IPOs being launched before a pause on account of the general elections. This even includes foodtech major Swiggy, which has set its sights on a stock-market debut next year. It is seeking to raise over a billion dollars.

Should you invest?

While companies are going gung-ho about IPOs, experts advise investors to take into account some key considerations before putting their money in them.

Understand the company: As is true for any investment, you start with companies & industries you understand well or are interested in. And then you learn as much as you can about the company. To reiterate, there are no shortcut approaches which will lead to consistently finding multibaggers. "IPO investment is no different from any other equity investment. Find out if the company has a sustainable growth model, has good governance practices and is available at reasonable valuation," says Nilesh Shah, MD, Kotak MF.

Read Red Herring Prospectus carefully: While quick heuristic decisions and rules of thumb can be effective for experts, the most reliable approach is to thoroughly read one key document: the Red Herring Prospectus. "Following stories about major IPOs can be thrilling, and it's easy to get caught up in the frenzy of participating. To ensure you understand the associated risks, it's crucial to read the risks section in the prospectus. In this section, the company's management details the specific risks they currently perceive, both within the company and in the industry at large. Being fully aware of these risks increases the likelihood of making a prudent investment decision," says Mohit Mehra, VP, Primary Markets & Payments, Zerodha.

Don't invest just for listing gains: Theoretically, if you believe an issue is underpriced and anticipate that the market will assign it a higher value upon listing, applying for a listing gain can be sensible. However, consistently achieving this is unlikely. "Issue managers and company management collaborate closely to ensure the issue is priced appropriately. While they often leave some potential gains for retail and other investors, they do not want this to come at the expense of a significantly lower company valuation," says Mehra.

Shah says it is always better to invest for the long term. "Investors invest based on tips, based on gray market premium, invest without doing any background research with the hope that it will result in quick gains. The way to avoid such mistakes is to make efforts to do research/ homework about the company. When you sell on listing, you pay tax and lose the opportunity to compound your money," says Shah.

Mehra explains this by an example: So, while listing gains of 50-100% create buzz when they occur, they are not common. Additionally, if you apply for an IPO that is heavily oversubscribed, you're likely to receive only one lot of shares, usually valued around Rs 15,000. A 10- 20% gain in such an IPO would translate into a listing gain of Rs 1,500-3,000. Assuming there are 20 such IPOs in a year, each with gains and oversubscribed by ten times and gaining 10-20% on listing, the total listing benefit you might get after considering the possibility of winning IPO allotment is around Rs 3,000-6,000. Given this scenario, you may want to consider whether this potential return is worth the time spent reviewing each IPO prospectus.

"For a retail investor, it can be overwhelming to pick the right IPO by watching grey market listing premiums & a brief surface review of the IPO. This can lead to a long portfolio tail of IPO stocks with no meaningful allocation due to oversubscripton. For a medium to long term investor, it is not necessary to participate in every IPO, rather take an informed review of an IPO, make the primary bid & continue to allocate more as the price trends favourably based on company results to build long term positons. If the time & access for research is limited, then reviewing listed stocks & allocating in equity based Mutual Funds is an efficient way to construct the equity allocations," adds Gabriel.

Look for IPO grading: IPO grading is the credit rating issued by any Credit Agency registered with the SEBI. An IPO can be graded in the range of 1-5 (1 being the worst & 5 being the best). The grading takes into account the prospects of the industry, the strengths & weaknesses of the company, the risk involved etc.

Lock-in periods: Many are unaware of the important fact that there is a lock-in period too in an IPO. If an IPO receives a tepid response, you might observe anchor investors looking to exit their positions once the lock-in period ends. "However, this doesn't always occur and largely depends on the institutions' perspectives on the company. While this shouldn't be the sole factor in your decision-making, it's important to consider if you don't have a long-term view of the company," says Mehra.