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IPO is a dangerous game...
Mon, 17 Oct Pre-Open

The Indian IPO market is witnessing its highest fund raising activity in the last six years. According to Baker & McKenzie, around 50 companies have raised US$2.93 billion in 2016 till date while another 22 companies are in the pipeline planning to mobilise US$2.90 billion during the remaining part of this year. This includes companies like Vodafone India Ltd, PNB Housing Finance Ltd, and International Tractors Ltd.

Recently, we saw a hype around ICICI Prudential Life Insurance IPO. It was a landmark event for many reasons. Not just because it was the first insurance company to seek listing. But also because, despite an issue size of around Rs 60 billion, it was oversubscribed ten times! The huge response to the IPO is not really a surprise given the sentiments in the market and the appetite for new issuances. But this has not been the case in recent years.

Mega share sales in India's IPO market have been few and far between over the past six years. The last time there was a rush of mega IPOs was almost a decade back. Between 2005 and 2008, sectors such as energy, utilities, and real estate were in vogue for new listings. And the one thing that was common to each overhyped and hugely oversubscribed issue at the peak of the IPO boom was a blind faith.

Investors had blind faith in the fortunes of the sector whose mega issues were being peddled like hot cakes. Whether it was DLF, HDIL or Reliance Power, investors bought into the sector's glory rather than the companies' financials. They completely dismissed possible challenges and pitfalls of the sector and the businesses. And the promoters were only too happy to take home valuations they could have hardly imagined.

With the bull run over, the reality for each of the sectors gradually set in. It's no surprise that investors' blind faith in these sectors' prospects did not fetch the desired result from these mega oversubscribed IPOs.

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 last few months of 2016. 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.

And remember... IPO is a dangerous game. The odds are stacked against you. Be very careful. Understand the business, don't pay too much. Look at IPO from long-term perspective.'

In the primary market, the company fixes the price. Once the share lists on the exchange, it is the market who determines the price.

So when the odds are in your favor, play your game. Until then, wait, wait, and wait...

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

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Jul 28, 2017 12:18 PM

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