Have you burned your fingers in IPOs? Do you want to learn from your mistakes and earn profit from upcoming IPOs? If yes, then read along.
Key Takeaways
Let's start with a quick refresher on IPOs.
What is an IPO?
IPO is short form of Initial Public Offering. When a company goes public, it sells shares of its stock to the public for the first time. As an investor, you can buy these shares on the open market or during the IPO. Initial public offerings (IPOs) can be a potentially lucrative investment opportunity, but they also come with risks and uncertainties.
What is the opportunity?
You get to buy shares of the company at the ground floor, potentially giving you the opportunity to see significant returns on your investment if the company performs well in future. The preconditions to harnessing the opportunity are:
a. a long-term perspective
b. your due diligence and thorough research about the company
What are the risks and uncertainties?
The company is going public for the first time and has not yet proven itself in the public market. There is no guarantee that the company will perform well, and the value of the shares could go up or down depending on a variety of factors. Additionally, there is often a lack of information available about the company prior to the IPO, which can make it difficult for investors to make informed decisions about whether or not to invest.
The price of an offering is often not determined by the market, but rather by a small group of investment bankers. This can lead to valuation mismatches due to factors such as biased opinions and inadequate research. When the shares start trading and the whole market participates in the price discovery on the first trading day, the true value of the offering is revealed. If there is a significant difference between the true value and the initial price set by the investment bankers, it can result in significant price fluctuations, putting retail investors at risk.The Secret: why so much price fluctuation after listing at times?
What are the key statistics about IPOs in Indian Stock Market?
Having cleared the basics, let's have a look at some high level stats on IPOs launched in Indian stock market. However, a quick disclosure first - this data comes from our database and actual numbers might be slightly different. Having set the expectations right, here are IPOs in numbers and charts from our database launched since 2010:
Yes some of them get delisted and suspended too. Total capital wipe out if you did not get out at right time. I know some of you are cursing me for the cringe memory, but it is what it is. Let bygones be bygones and move on.
Have a look at the same data with some additional dimensions. I hope some of them will really tickle your thinking brain. This is going to be more interesting from here.
What about the Historical performance of IPOs?
Allow me to add the performance angle now. The performance of IPOs in the Indian stock market has been mixed bag, with some companies seeing significant gains after going public while others have struggled. So how the active once have been performing? The table below will give you a rough idea of historical performance. We will delve deeper into these numbers once you have got a hang of it:
* As I have disclosed earlier, this is approximate data based on what we have in our database. Plus there will be some small variation in numbers when we take corporate actions like bonus and stock splits into account as the data is not bonus and split adjusted.
The data looks interesting. No? So what is the key insights to draw from above data? Yes you are right.
Approximately 50 % of the IPOs fail to generate positive returns for investors.
It hurts to know this, but stock market has always been like this - a 50-50 chance game. It is impossible to predict the future movements of IPOs too with certainty, and even the most experienced investors make mistake. Having said that, it's not all gloom and doom.
If you do your due diligence and carefully research the company before deciding to invest, the odds will surely get more favorable.
Why I am saying this? Will clarify in a moment. But before that, let me share the characteristics of a successful IPO.
Highly successful IPOs exhibit:
So such IPOs must exist if I am right? They do exist. Wanna have a look? Ok, here is the list of IPOs with price diminishing corporate actions (bonus,stock split, dividend), but still trading above their issue price. This is what very successful IPOs look like. Spot the next one early and thank me later. By the way, have you heard, in the long run a company's stock price is a slave to its earnings. If you look carefully enough, sales growth has been the strongest determinant of IPO out performance too. Click on the table rows and you will surely agree. Clicking will load the price/volume, revenue, profit charts along with corporate action details in a popup. Spend some time with it and hopefully you will start getting a hang of what to look for in the next issue. This article is not only about applying for an IPO, but covertly also about spotting a multibagger. So, if you didn’t get the IPO in the offering, you can still go for them if you see the above traits post listing.
If you are curious about valuation, then you can use the price-to-earnings (PE) ratio to assess their valuation. However, before getting freaked out by high PE number, keep in mind:
A high PE ratio may indicate that investors are expecting the company to experience strong growth in the future.
Now click on the button below to get the current valuation of above stocks using the PE ratio. Just in case you want a more detailed PE analysis, you can do it on our Stock PE Chart page.
Having looked at the good performers, it's time to look at not so good performers. As I said it's a 50-50 chance game. Here is the list of IPOs with price diminishing corporate actions (bonus,stock split, dividend), but trading below their issue price. Quite a few of them might not be worthy of investment, but not all because of the nature of corporate action. It's price diminishing so even though the current price is below issue price, some from the list may be generating appreciable return for the investors. Do double check the data after taking bonus/split adjustments into consideration before reaching any conclusion. Yes you are on your own for this task.
In case you want to have a look at their valuation too, then can use the button below as earlier. Do it as will add perspective to why, most of the time, good performers trade at higher PE as compared to duds.
Hope I still have your attention. If so, then let me show you the performance of IPOs who have not issued bonus shares or undergone stock split. First, the list where the current price is above the issue price. Again this list is winners list. Having said that, there will be some laggards among winners too. So don't fret if you see some names which you don't like.
Finally, here is the list of super duds - IPO's without bonus/splits and still trading below their issue price. If you lost money in them then forgive yourself. Consider them as sins of your past life that got paid back through these IPOs.
Enough of data. Now a little bit on how to avoid bad IPOs.
There are several factors to consider when deciding whether investing in an IPO makes sense for you. Here are a few things to keep in mind:
- Company performance: Look at the company's financials and track record to see if it's performing well and has a solid business model.
- Market demand: If there is strong demand for the company's stock, it could potentially lead to a higher price after the IPO.
- Potential for growth: Consider whether the company has potential for growth and whether it's in a sector that is likely to grow in the future.
- Risk tolerance: IPOs can be risky, as the company's financials and future prospects are not yet proven. You should carefully consider your own risk tolerance before investing in an IPO.
Does it sound too bookish? Let me try to simplify it. In general, the success or performance of a company after an IPO can depend on a variety of factors, including the company's financial health, the strength of its business model, the demand for its products or services, and the overall economic environment. However, a pure common sense deadly trio to loose money in an IPO are (click to expand for details):
During periods of market euphoria, investors may be more likely to make impulsive decisions and overpay for assets. This can lead to higher valuations for IPOs, making it more difficult for investors to realize a profit.
There is no one-size-fits-all formula for quantifying the aggressive pricing of an initial public offering (IPO). The price of a company's shares in an IPO is typically based on a variety of factors, including the company's financial performance, market conditions, and investor demand. As a result, it can be difficult to determine whether an IPO is aggressively priced or not.
One way to approach this problem is to compare the price of the IPO shares to the company's earnings per share (EPS). If the price of the IPO shares is significantly higher than the company's EPS, it could be considered aggressively priced. For example, if the company's EPS is INR 10 and the price of the IPO shares is INR 100, you can see it as aggressive pricing.
Another way to assess the aggressive pricing of an IPO is to compare the price of the IPO shares to the prices of similar companies in the same industry. If the price of the IPO shares is significantly higher than the prices of other companies in the same industry, it could be considered aggressively priced.
Some signs that an IPO may be over hyped include excessive media coverage with limited or no financial information. Another sign is insiders selling in the IPO. If company insiders, such as executives and board members, are selling large amounts of stock in the IPO, it may be a sign that they are cashing in on the hype and do not have confidence in the long-term prospects of the company. However, the most telltale sign is you believing it without even fact checking once.
Spend some time assimilating the three points above and it will save you from most of your IPO investing mistakes of future.
Ok, I have said enough now. Will leave you with few interesting questions to think about:
2. If several recent IPOs start trading at prices lower than their offer price in a row, is it an indicator of market top and vice versa?
3. Does the issue size have any predictive power about future performance?
The answer lies in above data, however you will have to make your hands dirty :-). Thanks for being patient for so long. You really have an inquisitive mind.
And before I take your leave, here is a list of common IPO jargons arranged alphabetically for your reference:
- IPO price: The price at which the company's shares are offered to the public during the IPO.
- Green shoe option: A provision that allows the underwriter to sell additional shares beyond the amount initially offered in the IPO.
- Issue size: The total number of shares that the company is offering for sale in the IPO.
- Lead investors: Institutional investors that are among the first to invest in a company's IPO.
- Lead underwriter: The main financial institution or firm responsible for coordinating the underwriting process and managing the sale of the securities.
- Lock-up period: A period of time after an IPO during which company insiders are restricted from selling their shares.
- Over-allotment option: An option that allows the underwriter to sell additional shares beyond the amount initially offered in the IPO.
- Pre-IPO financing: Financing that a company raises from investors before going public, including equity financing (issuing shares) or debt financing (issuing bonds).
- Pricing range: The range of prices at which the company's shares are expected to be sold in the IPO.
- QIP: A process through which a company can issue and sell shares directly to institutional investors in the domestic market, without going through the traditional IPO process.
- Roadshow: A series of presentations and meetings that a company holds with potential investors before an IPO.
- Underwriter: A financial institution or firm that helps a company issue and sell securities to the public.