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IPO Investing

In this episode, we explain the process of IPO Investing and how you can gain from it.

5454 views  14 Nov 2017

IPO Investing

Initial Public Offering (IPO) is the way an organization goes public, lists itself on the exchanges, and sells share to raise capital. By participating in an IPO, investors can buy shares of companies before they trade on stock exchanges. However, in case of an IPO, an investor will have to buy shares directly from the companies.

Investors can apply for shares under the following categories:

  1. Retail Individual Investor: Investors can not apply for more than Rs 2 lakh in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's.
  2. High Networth Individual (HNI): If retail investor applies more than Rs 2,00,000 /- of shares in an IPO, they are considered as HNI.
  3. Non-institutional bidders: Individual investors, NRIs, companies, trusts etc who bid for more than Rs 2 lakh are known as Non-institutional bidders. They need not to register with SEBI like RIIs. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's.
  4. Qualified Institutional Bidders (QIBs): Financial Institutions, Banks, FIIs and Mutual Funds who are registered with SEBI are called QIBs. They usually apply in very high quantities.

First steps of offering an IPO

To begin with, a company hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, they file the registration statement with SEBI along with the underwriting agreement. SEBI scrutinizes the disclosed information and if found right, it allots a date to announce the IPO.

Reasons for offering an IPO

  1. A company offers an IPO to raise money. Every company needs capital in order to expand, improve their business or infrastructure, or to repay loans etc. Trading stocks in the open market leads to increased liquidity.
  2. A company going public means that the brand has gained enough success to get listed in the stock exchanges. It is a matter of credibility and pride for any company.
  3. In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal.

The IPO process

  • Watch out for media alerts

    When a company comes out with an IPO, it usually advertises about it extensively to ensure that the issue is a success. If you are keen to invest via this channel, you should look out for related advertisements. However, it is very important that before applying for any IPO investment, an individual goes through the company's financial statements, its track record and management's future plans.

  • Manual Application

    An individual needs to fill up the application form which is easily available with the brokers or any agent who sells mutual funds. The forms come free of cost. Fill up the form as per the directions mentioned in the form. Also, attach a cheque for the amount of shares you wish to buy. There are a minimum number of shares one needs to buy for specific issues, which is specified in the application form. Submit the form within the mentioned time frame.

  • Online Option

    An individual can also apply for an IPO online through ASBA (Applications Supported by Blocked Amount). This is a process developed by SEBI while applying for an IPO. Through ASBA, the IPO applicant's money doesn't get debited until shares are allotted to them. An individual can login to his netbanking account and apply for IPOs directly.

    Scores of companies launch IPOs. However, there is no guarantee that it will perform well. And so, as an investor, you should thoroughly check and evaluate a company, its financials, its future plans before investing in its IPO.

Things you should consider before investing

  1. Background of the Promoter/Company: You should check if there are any criminal proceedings against the company or its promoters, or if the company has defaulted in the past or if there has been any legal complaint against the company or its promoters.
  2. Performance of the company in the past: Check how long the company has been into the business; evaluate its growth rate over the years.
  3. Financial health of the company: Go through the changes made by the company in accounting policies and be cautious of bloated profits.

Financial Ratios

  1. Earnings Per Share (EPS)

    EPS is an indicator of the company's profitability. EPS is calculated by dividing the net earnings by the number of shares in the issue. Investors also tend to calculate the future EPS in order to get an idea how much profit they will earn in the future.

  2. Price to Earnings Ratio (P/E)

    The P/E ratio indicates how the company is priced - whether it is cheap or expensive. It is calculated by dividing the share price of the company by it earnings per share. If the P/E ratio of a particular company is higher as compared to other companies in the same sector, it means that the shares are overvalued.

  3. Return on Capital

    Return on capital is the profitability ratio of the company. If the return on capital of a particular company is higher, it means that the company is growing and is successful. This ratio is calculated by dividing the EBIT (Earnings Before Interest and Tax) by capital employed.

Objects of the Issue

Check where the money raised from investors will be utilized. Find out whether it will be used for any of the following: Diversification of business, acquisition, open new branches, or for fund subsidiaries.

Recent IPO Performance

# Issue date Issuer Company Issue Size INR Offer price INR Current Market Price INR Gain / Loss
1 17-Jul-17 Salasar Techno Engineering Ltd 36 108 300 178%
2 21-Jun-17 Central Depository Services (India) Limited 524 149 371 149%
3 24-Aug-17 Apex Frozen Foods Ltd 152 175 426 143%
4 19-May-17 PSP Projects Ltd 212 210 429 104%
5 8-Sep-17 Dixon Technologies (India) Limited 600 1,766 2,704 53%
6 16-Jun-17 Tejas Networks Limited 327 257 383 49%
7 11-May-17 Housing and Urban Development Corporation Ltd 1,224 60 87 45%
8 10-Oct-17 MAS Financial Services Ltd 460 459 646 41%
9 15-Sep-17 Capacit'e Infraprojects Limited 400 250 349 40%
10 3-Aug-17 Cochin Shipyard Ltd 1,468 432 576 33%
11 26-Sep-17 Prataap Snacks Limited 482 938 1,172 25%
12 6-Oct-17 Godrej Agrovet Limited 1,157 460 568 23%
13 19-Sep-17 ICICI Lombard General Insurance Company Ltd 5,701 661 681 3%
14 19-May-17 IndiGrid InvIT Fund 2,250 100 98 -2%
15 20-Jun-17 Eris Lifesciences Limited 1,741 603 580 -4%
16 2-Aug-17 Security and Intelligence Services (India) Ltd 362 815 782 -4%
17 11-Oct-17 Indian Energy Exchange Ltd 1,001 1,650 1,563 -5%
18 5-May-17 IRB InvIT Fund 5,921 102 95 -7%
19 22-Sep-17 SBI Life Insurance Company Ltd 8,400 700 643 -8%
20 13-Oct-17 General Insurance Corporation of India 11,373 912 837 -8%
21 13-Sep-17 Matrimony.com Limited 501 985 878 -11%
22 8-Sep-17 Bharat Road Network Limited 601 205 181 -12%
23 23-Jun-17 GTPL Hathway Limited 485 170 141 -17%
24 28-Apr-17 S Chand and Company Ltd 729 670 488 -27%