The IPO scene may be abuzz with launches, but an investor must bank on fundamentals to decide.
Source: Tavaga Research
A new initial public offering (IPO) or a new IPO plays an important role in the economy of India. A new IPO listing lets in new investors, hailing from the public, into the primary financial market, and encourages the distribution of information among all as the listed company disseminate mandatory knowledge about itself in the listing process. A new IPO also powers the listed enterprise with fresh capital at the optimum cost. A new IPO is a key step to creating fresh equity shares for trading in secondary markets. Overall, new IPOs help prop up the primary market even when there is volatility in the secondary market.
However, it is not always a well-lit path for enterprises listing on the bourses with an IPO. Enterprises tend to go public (ie. list their IPO) when the environment is bullish. The sentiments in 2019 have been far from buoyant (even the ever-rising bourse indices are displaying volatility).
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Only 16 companies have been listed in 2019, raising Rs 12,362 crore (according to BloombergQuint). In 2018, 24 companies had listed raising a sum of Rs 30,959 crore, in 2017, and 36 companies raising a sum of Rs 67,147 crore.
However, even in the current times, when the economy has slowed down, investors, both domestic and foreign, are feeling bearish, and trade wars between the US and China loom large, new IPO listings by companies with good fundamentals are still finding favor with investors.
The recent and anticipated new IPO of IRCTC (Indian Railways Catering and Tourism Corporation) which got listed on 14th October was oversubscribed 111 times, and the shares were offered in the price range of Rs 315-320. The equity shares are now trading in the secondary market at around Rs 1375 (as of 20th July 2020), multiplying investors’ earning more than 4 times.
Other new IPOs in 2019 have done well too. Polycab India (electrical wire manufacturer), Chalet Hotels, Spandana Sphoorty Financial, and Rail Vikas Nigam (India Railways’ engineering arm) have seen their share price rise between 7 and 30 percent since their listing this year.
Affle, a social media tech company, and Metropolis Healthcare, the diagnostics chain, have had their equity share prices rise between 40 and 50 percent.
Performance of Metropolis Healthcare since the IPO
IndiaMART InterMESH, saw the highest rise of as much as 95 percent in share price since launch on BSE, while Neogen Chemicals saw a 76 percent increase.
Performance of IndiaMART since the IPO
CSB Bank, which launched its IPO in the last week of November, saw its issue oversubscribed by 87 times on the last day. One of the oldest private banks in India, it is owned by the Canadian billionaire Prem Watsa’s Fairfax, with offices in southern states and Maharashtra, it was aiming to raise Rs 410 crore. On its secondary market debut this week, its share price jumped 50 percent above the issue price of Rs195 a share.
The Rs 750-crore IPO of Ujjivan Small Finance Bank, despite a recent audit, carried out by RBI on small finance banks’ deficiencies in fraud management, rating methodology and categorization of priority-sector loans, saw an oversubscription of 170 times on the last day of its share sale on December 4, 2019. The price band of Rs 36-37 of the company, operating in the microfinance space, has made it an attractive buy because of steady growth in assets and the quality of its assets.
SBI Cards and Payment Services Ltd., which launched its IPO in the 1st week of March, did not perform as per the expectations because of the fear of pandemic due to COVID-19. However, it was successful in raising Rs. 10,340 crores as the issue was oversubscribed 26.54 times.
Performance of SBI Cards since the IPO
Is IPO a Good Investment (For Retail Investors)
Like most investment avenues, new IPOs should also be assessed by us for a fit. New IPOs are one way of investing in equity shares, the other being trading in them on the secondary market or the bourses. So, the earning potential of new IPOs can only be determined if we study the new IPO companies, which are issuing the equity, necessary knowledge for equity-share-related transactions. The operative metric would be the valuation at which the new IPO is being floated, which a fundamental analysis will reveal.
Whether the price band in which the IPO is being launched is reasonable or not is the question to ask ourselves.
Investment banks often act as the lead banker on a new IPO because new IPOs are a great way to let founders and early-stage investors, especially of young ventures, cash out their stakes in the enterprise. So, when an investment banker or the underwriter tries to create noise with phrases like ‘bright future’, ‘cheaply-priced’, ‘once-in-a-lifetime opportunity’ around a new IPO, retail investors like us should take it with a pinch of salt as they are just a part of the sales pitch. New IPOs after launch, may end up trading at prices lower than their initial price, shaving off value from our investment.
Savvy early-stage investors are here to ensure IPOs create as much din as possible to extract the most value out of their early bets, especially in the case of private enterprises floating new IPOs.
Gone are the days when companies had no other option but to tap the primary market for raising funds. An ecosystem comprising venture capitalists (VCs), big private equity (PE) players, and ultra-HNIs (high net-worth individuals) eager to invest in startups ensures that by the time companies hit the IPO market, they have seen their valuation multiply that gets reaped by the early investors.
What are the new IPO stocks?
Any company which wants to raise funds for its business can either go for borrowing or issue shares of the company. The second route leads to an IPO and creates new stocks of the just-listed company.
Equity shares or stocks represent the ownership of the company, and an IPO offers that to the public.
The IPO lets early-stage investors liquidate their stakes.
Companies that are going for an IPO ties up with an investment bank to help it sell its security. The investment bank then lines up the subscribers who will buy the security. Investment bankers call this process book-building as it tries to build a book of orders for the offering. Book-building may be done with a fixed price quoted or with a price band, which allows a final price to be set on the last day of the IPO, based on the bids.
Investment banks support book-building by providing investment information and research about the issuer to the public such as through a prospectus. The issuing company has to make a detailed disclosure of the business, the risks involved, and the intended use for the new fund.
Investment banks generally have two kinds of offerings:-
In an underwritten offering, the investment bank guarantees the sale of the issue at an offer price that it negotiates with the issuing company. If the issue is undersubscribed (ie.number of shares on offer outnumber takers for them), the bank buys the shortfall at the issue price.
In a best-efforts offering, the investment bank acts only as a broker. If the offering is undersubscribed, the issuer will not sell as much as it hoped to sell.
In both of these offerings, the company together with the investment banks fix the issue price of the shares, after assessing the market conditions and the company valuation.
If the offering is undersubscribed, some number of shares on offer go unsold. If it is oversubscribed (ie. takers for the shares outnumber the volume of shares on offer), the securities are allocated to preferred clients or on a pro-rata basis.
The price of an equity share in an IPO is often finally determined during the period the IPO is open for subscription. Investors or subscribers advance bids or quote a price that is equal or more than the floor price set by the investment bank during the book-building process. The final price is fixed after the closing date of the IPO and the shares are then allotted.
Oversubscription is not always a sound indicator of an IPO’s suitability for an investor. The New India Assurance IPO is a case in point. It raised the sum the company aimed for (a neat Rs 9,600 crore) but was not so beneficial for the IPO subscribers.
Listed in 2017, the IPO issue was oversubscribed by 1.07 times. Experts say it was a result of the investment banks and underwriters’ enthusiastic marketing and roadshows that led to it. But when the stock hit the bourses, it started being traded below the Rs-800-a-share issue price and has since fallen to being traded at Rs 150-152 a share. Overvaluation of the general insurance company’s worth is said to be the cause of its downfall, erasing investors’ wealth.
A study in contrast is the stellar launch of the IRCTC issue. The catering and tourism subsidiary of the Indian Railways, raised around Rs 645 crore, with shares priced at Rs 320. Not only did it get oversubscribed by almost 112 times, on its market debut in October, it got listed at Rs 644, doubling the wealth of its IPO subscribers in a day. The stock of IRCTC is trading at Rs 1375 a share, pegging its valuation at around 22,018 crores.
Performance of IRCTC since the IPO
Upcoming IPO calendar
If we have missed the IPO bus so far, we have other upcoming IPOs to look forward to. New IPO 2020 or the IPOs lined up for the next year include the National Stock Exchange (NSE) itself, India’s largest by way of volume.
As we near the end of 2019, the list of upcoming IPOs in 2019 in India is thinning but the one with new IPOs in 2020 is robust.
Apart from NSE, other financial markets-related IPOs in 2020 include National Insurance Company, Angel Broking, and AnandRathi Wealth Management. Another sector keen on launching new IPOs seem to be FMCG (fast-moving goods), and food and beverages (F&B) within it.
Food brands such as Anmol Industries (of Anmol biscuits fame), Mrs. Bector’s Food Specialities (packaged food manufacturers and long-standing suppliers of condiments to fast food chains), restaurant chain Barbeque Nation Hospitality, and Punjab Grill-owner and restaurant chain, Lite Bite Foods (promoted by Dabur Vice-chairman Amit Burman) are gearing up with their IPOs for 2020. The US-based Burger King, too, has filed its Indian arm’s DRHP with Sebi.
Other consumer-facing companies include Flair Writing (Flair pens) and Patanjali Ayurved (Homecare and personal care FMCG). Aakash Education services and Senco Gold also have large consumer-facing segments of the business.
Of course, heavy industry companies in metal fittings, pesticides, and energy are also biding their time to float their IPOs next year.
Following is the list of tentative new upcoming IPOs in India which are scheduled for a 2020-launch:-
IPO Launch Date
If we find ourselves asking, “How do I find a company’s IPO date?” it might be a little unsettling to know that there is no one-stop solution.
News of filing of red herring prospectus by popular or promising companies gets reported in the business media. Sebi, NSE, and BSE websites all have pages dedicated to companies that have initiated the process. These sources adequately answer, “How do I find new IPO stocks?” Tentative launches are new IPO stocks as once launched they move to the secondary markets for trading.
But the date of the IPO launch is not set in stone. Depending on the economic environment and investor sentiments, companies may defer the actual issue by months after the prospectus filing. Sebi allows companies to launch an IPO anytime within one year of filing their DRHP. Even the list mentioned above of IPOs 2020 is not a guaranteed list as the enterprises may change their mind and defer the launch. NSE itself has been deferring its IPO for some time now.
A company’s IPO launch date can only be found by following the news and of course, from brokers. On the day of the launch, the bourses’ websites will have the company listed on their IPO watchlist with the pricing details and the status (live or not).
A hack that could be useful is to set up a Google alert with the keywords of the company’s name and ‘IPO’ after we choose which ones to watch out for from the list of filed DRHPs. Updates may be set for frequencies ranging from daily, weekly, monthly, and so on.
IPO Watch Allotment Status
After bidding for an IPO issue closes, allotment begins. Bidders can check their status of receiving shares with the registrar to the offer. It also reflects in the demat accounts.
But allotment in the case of oversubscription is based on different quotas, which are:-
Retail individual investor: It means an investor who bids for the security for a value of not more than Rs 2,00,000. Not less than 35 percent of the net offer is to be made available to such investors in case the company makes an issue of 100 percent of the net offer to the public via a voluntary book-building process. The allotment ratios change if it is a compulsory book-building or a fixed-price issue.
Qualified institutional buyer: It includes a broad spectrum of investment funds such as MFs, pension, and provident funds, insurance funds, foreign institutional investors, financial institutions, etc, all defined by Sebi. Not more than 50 percent of the net offer is to be made available to such investors in case the company makes an issue of 100 percent of the net offer to the public via a voluntary book-building process.
Non-institutional buyer: An investor which does not qualify as a retail or a QIB. Not less than 15 percent of the net offer is to be made available to such investors in case the company makes an issue of 100 percent of the net offer to the public via a voluntary book-building process.
When retail investors like us subscribe to an IPO, we may bid for not more than Rs 2,00,000 worth of shares then. However, the fundamental analysis of the issuer cannot be ignored as it will tell us whether the pricing has been done right or not. Overenthusiastic underwriters can mislead the public with a media blitzkrieg but an accurate estimate of valuation won’t.