In 2021 so far, 57 companies have made their debut in the stock market raising more than Rs 1.1 crore so far.
An initial public offering (IPO) is one way to enter the stock market. However, before it is listed, the issue price for the public offering is calculated manually, taking into account the various factors that affect the pricing of the public issue of the shares of the company in question.
The new public offering has been the new excitement in the market, capturing the public’s attention like never before. In general, a booming stock market often provides the ground for a spike in IPOs. In 2021 so far, 57 companies have made their debut in the stock market raising more than Rs 1.1 crore so far! “This madness does not see stopping with a number of other issues at stake for this month,” said Nitin Mathur, CEO of Tavaga Advisory Services.
Because there are misconceptions that prior to listing, company stock prices were generally available at a cheaper price than after listing, many people are trying to take advantage.
“A common perception in everyone’s mind is that IPOs are meant to generate short-term gains and do not generate returns for long-term investors,” Mathur said.
However, stocks are intended for long-term investments, and the pursuit of short-term gains from IPOs may be counterproductive, should the IPO be overvalued.
Well, that’s true but up to a point. About half of the IPOs in the last 10 years have generated negative returns! We all know the fate of some IPOs in the past like Reliance Power, DLF and Jaypee Infratech. So why all the hype around them after all? Most investors go to IPOs due to being overly optimistic about the company and the new age sectors they belong in. Social media and excessive liquidity have simply added to this euphoria resulting in very high valuations at which these IPOs are listed and thus, when the euphoria around them fades, they tend to Most of these companies underperform because they fail to meet market expectations, Mathur said.
However, in case of undervaluation, the IPO may provide a profitable option to earn some quick returns.
Having said that, not all IPOs are bad. It also turns out that about a quarter of the IPOs since 2010 have been multi-bag, that is, generating more than 100 percent of the proceeds from the date of their listing. Delightful foods, fixed regimens to name a few. Thus, investors should carefully evaluate IPOs on a case-by-case basis before investing. Certain factors like sustainable business model, strong fundamentals, growth potential, quality of promoters, justified valuations, etc. should be considered before investing in IPOs for long-term investment. “Investors with a longer time horizon should avoid making investment decisions based simply on market noise,” Mathur said.
For a long-term investment in an IPO, investors must be absolutely certain about the sustainability of the company in question, before making an investment decision.
“A company with a sustainable business model, strong fundamentals, reasonable valuation, quality of promoter/management, and growth prospects determine the longevity of an investor’s interest. For fundamentally healthy companies, investors should not worry about including gains/losses. Investing in ValPro, Neha Khanna, said Long-term IPOs only make sense when you believe in the company’s long-term growth potential.
As for investing in a long-term IPO, according to Khanna, investors can check the following:
(1) Understand the business and growth potential – Recognizing market opportunities and the company’s ability to gain market share can be an important criterion for decision-making. Companies with high growth potential will be able to generate regular profits and increase their revenue.
(ii) How the company will use the proceeds—just to pay off debts or to expand the business.
(3) Background of the promoter and management team: The investor should check closely who is running the company. The management of the company is responsible for pushing it forward.
(iv) The financial performance of the firm must be evaluated to check whether its revenue and profits have been growing or declining during the past few years.
(5) Investors should closely identify the company’s peers and evaluate comparative valuations to determine whether or not the company’s ratings are in line with their peers.
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