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Be Careful When Picking IPOs in 2017
Mon, 9 Jan Pre-Open

India's primary share market is on a roll. After a record Rs 136 billion raised through Initial Public Offerings (IPOs) in 2015, it was once again raining IPOs in 2016. Indian firms raised Rs 265 billion through initial public offers in 2016, making it one of the best years for IPOs on record.

With offers worth Rs 65 billion already approved by market regulators, we decided to check if 2017 could be an equally promising year for the IPO market.

And we've found that despite the stellar rise of the IPO market in 2016, the sentiment may not carry forward in 2017, thanks to global uncertainties related to U.S. President Elect Donald Trump's policies.

Also, with US Federal Reserve's proposed three rate hikes next year, analysts are concerned over the participation of Foreign Institutional Investors (FIIs) in upcoming public offers. Foreign portfolio investors have been net sellers, selling shares worth Rs 312 billion, in the December quarter. This makes it the worst quarter on record for foreign portfolio flows since March 1993.

It is worth noting that the revival in the IPO market last year has not helped capex recovery as much over the past year as before. While the number of IPOs has surged, a majority involved an exit by existing shareholders, including private equity players, instead of raising fresh money for expansion.

Twenty of the 26 IPOs in 2016 included an offer for sale of shares by promoters and PE investors. The money raised from such offers accounted for more than two-thirds of the total IPO proceeds.

In addition, the lackluster performance of most newly-listed firms in India may also dampen investor sentiments. The S&P BSE IPO index trailed the BSE Sensex and the broader market in 2016, after posting higher relative returns in 2014 and 2015.

Further, the impact of note ban on economic growth, and of state elections, could affect the sentiments in the market.

If the buoyancy in the IPO market continues this year, that trend may well reverse, and the primary markets could once again become a major driver of fresh investments in the Indian economy. But the chances of that happening appear quite slim this year.

Giving a doubtful IPO a miss can in no way reduce your chances to create long-term wealth. If you ask us, every IPO needs to be evaluated on its own merit. When there is a need to go through a checklist for buying stocks, why not so in the case of IPOs?

There are several big IPOs in the pipeline in the upcoming few months of 2017. In case you wish to run them through a handy checklist, we have something for you. Download our Handbook of IPOs to be able to pick only the right ones for you.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Mar 20, 2018 11:17 AM