Your IPO Investing Guide for 2022. Prepare Yourself for a Flood of IPOs

The flood of IPOs in 2021 has been historic.

First of the blocks were the likes of IRFC, Kalyan Jewellers, and Brookfield REIT. They set the trend early in the year for the mega IPOs to follow.

Then investors went crazy with Zomato and Power Grid InvIT in the middle of the year.

Finally, Nykaa, Policy Bazaar, and Paytm completed the frenzy towards the end of 2021.

In between some big IPOs hit the market. Marcotech Developers, Aditya Birla AMC, Sapphire Foods, Chemplast Sanmar, Nuvoco Vistas. They all attracted investors to varying degrees.

It's estimated that the funds raised by all these new public issues this year will exceed Rs 1 trillion!

2021 was indeed a record breaking year for IPOs. But what about 2022?

If you're interested in making big money from IPOs next year, this editorial is for you.

Let's dive in...

What will be the big IPOs of 2022?

As per the news in the last week of December 2021, there are 4 big ticket IPOs lined up for 2022. These are widely anticipated by investors.

Life Insurance Corporation of India (LIC)

This is the biggest one of course.

The latest news is that the company and its investment bankers are ironing out the valuation of the IPO. It's expected to hit the market sometime in the January-March quarter.

This IPO is crucial for the government too. The IPO funds will help it achieve the fiscal deficit target.

Byju's

This IPO has been hyped and is widely anticipated.

India's biggest EdTech firm has been reported to be in the pre-IPO phase. It's expected to file its IPO papers with the market regulator after the end of the financial year. The IPO could hit the market in mid-2022.

Ola

India's biggest ride-hailing aggregator is also looking at an IPO next year. News reports say it's looking for a valuation of around US$12-14 bn.

Ola is different from most tech startups in that it's profitable. It's IPO is sure to be well received in the market.

Delhivery

This could be the first of the big IPOs of 2022. The company has already filed its IPO papers with the market regulator.

The size of the IPO could about Rs 50 bn.

These are only the big ones. There are others too, like MobiKwik, which could hit the market in 2022.

As long as the market sentiment remains bullish, we can expect another flood of IPOs just like in 2021.

So what is the best way to profit from these IPOs?

A Different Way to Achieve IPO Riches

Most people, when they discuss making money from IPOs, are only interested in listing gains.

And that's understandable. Many IPOs have provided handsome profits upon listing. As there is a gap of only a few days between applying for an IPO and booking profits, it's an enticing bet.

But there is a better way. It's possible to make even more money than listing gains with less risk.

How?

Think of IPOs as unlisted businesses

The management of a business that comes to the market for the first time will have to change the way they run their business.

After an IPO, they're responsible for thousands, even millions, of individual shareholders.

They have to open up the company to very high levels of public scrutiny from investors, regulators, and the media.

They have to a lot more transparent than before in terms of providing information and disclosures.

They have to follow many more rules than they did before as an unlisted company.

All this requires a big shift in mindset.

And to be honest most people who run these firms are just not ready for the challenge on day one.

They were only interested in raising money from the public, not looking after their interests.

That's why you see share prices of many newly listed firms fall after the IPO. It's because the market figures out what the management is all about.

Now here is the important point...

This may not be a bad thing. Sometimes the management just needs some time to get up to speed with the new reality of being a listed company.

Investors may not always be correct in blaming the management if the stock price drops after listing. It could be a case of misplaced expectations.

This is why it's best to think of a newly listed company as an unlisted company.

They may be listed but they will need time to start operating as a professionally managed company.

In the interim, the stock price may go up or down or sideways. That's fine. If you have invested in the IPO, take the time to understand how the management is trying to manage this change.

Are they communicating clearly about how the IPO funds are being spent? Are they misallocating the money?

How are they implementing their plans to improve the company's sales and margins? Will the future be better than the past?

If the management made any short-term post-IPO promises, did they keep their word?

Don't take the management's words at face value. Check their words with their actions. Did they follow through on their promises? If not, why? Are they trying to shift the goal posts?

Remember to think of it as a still unlisted company.

This will give you insight into how responsible the management is with your money.

If they don't appear to be behaving in an ethical and professional manner, your choice is simple: Sell the stock.

You may suffer a loss. They stock may have crashed. Yes, that's possible but it's better to get out at that time.

On the other hand, the stock may have gone up.

That's great. But you should still sell.

Sooner or later, the market will wake up to the fact that the management is not trustworthy.

What if you find the management is doing a good job?

In that case, assuming the stock is not too expensive, consider adding to your position.

All this time don't forget to maintain a good asset allocation. Don't put all your money in just one or two stocks. Here is Equitymaster's suggested asset allocation based on marketcap.

How long should you hold an IPO stock?

Well there are very few genuinely great stocks which you can hold forever.

Thus, don't be surprised if you find that you may have to sell your IPO investment sooner that you expected to.

Here's the important point...

In the long run, it's very likely that your IPO investment, no matter what the initial hype was, will just end up as just another ordinary stock.

In other words, the only things that will matter in the long-term will be bread and butter fundamentals - earnings growth, return on capital, sales, margins, cash flow, dividends, etc.

This is why you should consider booking profits if your IPO investment beats your return expectations.

To Conclude

We recommend you follow this simple checklist.

Is the management delivering as promised? Yes/No?

If No, then Sell.

If Yes, then check the stock price and implement point #2.

Has the stock outperformed your expectations? Yes/No?

If Yes, then book partial profits and repeat #1 after 6 months to 1 year.

If No, then hold on and repeat #1 after 6 months to 1 year.

This way you will cut your risk significantly while profiting from any upside, based on how the management is adapting to the new reality of being in charge of a listed company.

This is a better way to invest in IPOs than approaching them only from the point of view of listing gains.

We hope this new way of investing in IPOs will help you build more sustainable wealth from IPOs with lower risk.

Happy Investing!