An initial public offering (IPO) is the process of offering shares of a private company to the public in a new stock issuance. This allows the company to raise capital from public investors who invest in IPOs in exchange for shares in the company.
With the market touching new highs, IPOs are getting lot of buzzes, and seeing this hype, many investors are getting attracted and joining the crowd.
An investor can apply for an IPO through his/her bank account or trading account.
Investing in IPOs isn’t as simple as it seems, as subscribers to the IPO don’t have in-depth access regarding business model, management quality and vision. Also, many investors are often confused if they should invest in IPOs for the long term.
According to Pranjal Kamra, CEO of Finology, while a few of the IPOs impress the street with their listing gain, most of them underperform in the long run simply because of the fact that they come with an over expensive valuation.
“Thus, investors should carefully evaluate the company before investing. A company with a sustainable business model, good fundamentals and justified valuation can be considered for long-term investment but investors should avoid making investment decisions based on hype-fueled oversubscription,” he illustrates.
Gopal Kavalireddi, head of research, FYERS considers investing in IPOs for listing gains considerably different from investing for the long term.
“While investor interest before and immediately after listing could be high, factors like the sustainable business model, financial metrics, quality of promoter/management and growth prospects determine the longevity of investor interest. Though IPOs from strong business groups or promoters normally go on to perform better, that hypothesis cannot be extrapolated to different industries, and also, cannot be considered as a foregone conclusion,” he opines.
This means, ultimately, it is the investors’ responsibility to peruse through quarterly financials, management interviews, analyst calls to understand the directionality of business and its growth.
Based on data of the last 5 years, on average, as Kavalireddi says, 50 percent of IPOs do perform well in the long run and continue to deliver good returns to investors.
Jyoti Roy – DVP- Equity Strategist, Angel Broking Ltd, also believes that it is a good idea to invest in long-term IPOs in India especially in the backdrop of continued improvement in the underlying economy which is positive for the markets.
“We expect that the benchmark Nifty should generate returns of 10-12 percent over the next year while broader markets are expected to do better. Therefore it makes great sense for retail investors to invest in the long term in good businesses that are coming out with their IPOs,” she feels.
However, Roy stresses that investors should only invest in IPOs of companies with good business models with good growth potential even if valuations are slightly on the higher side.
“Investors should also avoid investing in value traps i.e. companies with weak financials and businesses but cheap valuations. Investing in value traps has in the past led to value destruction while investing in good companies has led to significant value creation in the long run,” she explains.
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