IPO Investors' Best Friend

IPOs are attractive short term investment option and relished by very many. Yogesh Supekar & Karan Bhojwani bring forth the 'must do' list before investing in IPOs.

When it comes to investing in equities, three major trends have been discerned among retail investors for the last couple of years, viz., mutual fund investing, IPO investing and small cap investing.

Indeed, investors have shown preference towards taking exposure in equities via the mutual fund route as is reflected in the growing number of retail folios of mutual funds. However, IPOs are the talk of the town for the investors in 2017 as the current year promises to be one of the best years for IPOs in over a decade.

The table below highlights the impressive performance of IPOs (listing gains) in 2017 so far (27.06 per cent). In fact, if we consider the listing gains, only in 2007 and 2014 have we seen returns that were better than in the current year.

Also, an interesting aspect to note in 2017 is that the issue size of the IPOs have gone up considerably. The average issue size in CY17 so far stands higher by nearly 36 per cent when we consider the average issue size of approximately Rs612 crore per issue for the previous five years. However the average issue size in CY16 was higher at Rs1014.33 crore per issue, when compared to the average issue size of Rs836.86 crore for CY17.

This highlights the appetite for quality issues hitting the markets in current year. Says Arindam Chanda, Head, Broking, IIFL, " I would definitely say there is a huge interest from retail, high net worth and institutional investors for quality papers in the primary market. The investors' appetite has been consistently strong for at least the last one year now. Just like stock picking, we see investors taking keen interest in each IPO offering and seek advice and research on the same. Also, a new preferred route has emerged for investors to benefit from the euphoric primary market — the pre-IPO funds. We have a group offering — the IIFL Special Opportunities Fund, which has successfully raised over Rs5,000 crore and is still going strong". While there is no doubt on the prevailing optimism in both the primary and secondary markets, there are certain aspects that any investor looking for opportunities in primary market should focus on.

Anupam Singhi 
CEO, MarketSmith India (part of William O'Neil India).

The IPO market has been on a tear so far in 2017. The Indian exchanges saw 57 new companies getting listed on their platforms in the first half of 2017 raising USD 2.3 billion. This represents a growth of 50% in terms of the number of listings and 91% in terms of the amount raised, compared to the corresponding period of 2016. Most of the IPOs had the Offer for Sale (OFS) portion exceeding the proceeds from fresh equity sale. This clearly indicates that the growth in IPOs this year has been mostly due to promoters/private investors' propensity to cash in on the surging equity market. Majority of the IPOs came from the financial services sector.

Global IPO Market Performance : This year has seen a strong start for the primary market globally with equity markets inching higher on low volatility. In H1 2017, the primary market witnessed 772 IPOs globally raking in USD 83.4 billion. This is an increase of 90% by proceeds and 70% by number of deals, compared with the first half of 2016. H1 2017 was the most active first half of a year by global number of IPOs since H1 2007 (which saw 941 IPOs raising USD 146 billion). Region-wise, Asia-Pacific accounted for 61% of global IPOs and 44% of the total proceeds in H1 2017. China's Shenzhen and Shanghai exchanges led in terms of the number of IPOs, accounting for 17% and 16% of all IPOs worldwide, respectively. The increase in China's listings was partly a result of the effort by the market regulator, to speed up the IPO approval process.


"Must do list" before investing in IPOs :-
There are two ways to analyse a stock and make buying or selling decision fundamental analysis and technical analysis. It becomes difficult to apply both these methods efficiently when it comes to selecting IPOs for investment. Investors must follow following best practices when it comes to IPO investing :-

Read 'Red Herring Prospectus' carefully as it is the most comprehensive document where an IPO investor can get the most relevant information. Very few investors go through the red herring prospectus.

Investors need to pay special attention to the management team and its actual intention behind raising money and how does the management plan to utilise the money garnered via IPO.

On several occasions, the company that is getting listed does not have peer companies listed on the bourses and that makes it difficult for investors to evaluate the IPO stock. In such a case, investors can scan for globally listed company that matches the business profile of the new company getting listed in India. One can look at the valuations at which these global companies are trading and do a comparative analysis.

It may miss several investors' attention, but it could be useful to observe who is underwriting the issue (IPO). Bigger brokerages usually have better network and are in better position to run the IPO successfully. Bigger banks and brokerages will normally ensure that the new shares are placed with best possible investors.

The promotion of the IPO is key at times to the success of the IPO. Investors should be able to distinguish between a quality underwriter and an underwriter who has no proven track record. Investors should be extra cautious when any small investment bank with no track record is involved.

Even though an IPO may happen only once in the lifetime of a company, investors need to understand that not all IPOs are 'once in a life time' buying opportunities. The same company may come up with a follow-on public offer (FPO).

Not all IPOs are money-making investments and investors should not fall prey to the investment banker's aggressive sales pitch as these banks are interested in selling the shares to the public.

Multiple checks and scans are of paramount importance before one decides to park money in an IPO.

Use all the trustworthy sources possible like DSIJ in the public domain to understand the subscription data for the IPO and make informed buying decision. Usually, the subscription data will provide insight into the demand for the new issue. Knowing the demand for the issue makes the prediction of profitable listing easy.

Have a clear strategy in mind before investing in IPO. Your strategy should be able to answer the following :-

Am I going to use a flipping strategy or do I want to hold on to the shares for the long term? Flipping is a strategy, basically a short term strategy, where the investor simply sells the shares on the listing day.

Having a clear IPO investment strategy often helps investor to focus objectively on the investments.

In case you are short of funds for investing in a lucrative IPO , look for IPO funding options and check if it can be profitable after understanding the pros and cons of the IPO funding.

P. S. Ramalingam Investor

I have been regularly participating in IPOs but do not apply for all the IPOs. I usually apply for a single lot in those IPOs where I feel the potential is good. I have never gone for IPO funding and it is for the first time I am hearing about IPO funding

IPO Funding

IPO investing is an age-old practice which provides an opportunity for investors to book some short-term profits. IPOs are one of the most rewarding investment options for retail investors. These days, a decent listing on the bourses helps investors gain good amount of return in just about 6 to 10 days only. However, investors have been complaining lately on the allocation of shares, especially about those issues that are oversubscribed.

One of the ways to improve your chances of getting higher allocation is applying for large chunk in high net worth individual (HNI) category. The allotments are done in a proportionate basis in case of oversubscription for HNIs.

IPO funding or IPO financing is one way of participating in IPOs to maximise profits for HNIs. IPO funding is a simple loan offered by the NBFCs for applying to the IPO issue(s). In IPO funding, an investor has to just deposit margin money and the rest of the funds are loaned by the NBFC at interest rate ranging from 8 per cent to 12 per cent per annum (rate varies as per the lender).

Several of the NBFCs are involved in security-based lending business, while it is observed that most of the NBFCs involved in security-based lending business are part of stock brokerage firms.

As mentioned earlier, IPO funding is for the short term and, in most cases, it is for 7 to 10 days and the repayment tenure for such kind of loans is up to three months. Investor opting for IPO funding has to pay an upfront processing fee which varies from one lender to another. Apart from the upfront processing fees, the borrower has to pay other expenses such as stamp duty for loan agreement and for other documents as applicable.

The borrower simply has to pay the margin money and the remaining funds are arranged by the lender. Usually the ticket size is large for such lending and theDinesh Thakkar finance amount varies with the lender and the IPO. The loan amount runs into crores in most cases for the HNIs. Some of the NBFCs that are part of large broking group offer IPO funding with ticket sizes ranging from Rs1 lakh to Rs18 crore, while few lenders have Rs1 crore as the minimum loan amount. Axis Finance is one of the IPO financier and has minimum loan amount of Rs25 crore for such activity (as per company website).

For the first time investor, i.e. an investor opting for IPO funding, the process can be daunting. Says Gautam Munot, an HNI investor who had recently opted for IPO funding, "IPO funding may not be easy for the first timer as the documentation takes time. The documents need to be ready as you don't have much time in hand. I think IPO funding should be used carefully as it involves pledging of shares. However, it is a useful finance facility and helps me optimise returns on IPOs".

Apart from the normal KYC documentation and financial documents, the borrower has to follow the end-toend process of IPO funding Investors find the IPO funding advantageous because the IPO funding allows investors to apply for more shares and increase their chances of higher allotment. For successful listings, the profit margin is high in the short term and, at the same time, the risk is significantly high when the listing does not happen at a premium. Another big advantage of IPO funding is that the cash or securities can be used as margin. As the IPOs get listed quickly these days, the funding cost comes down drastically and the low interest rates environment also helps.

On the negative side, IPO funding can backfire when the listing is poor for the IPO. Things can go wrong even if both the borrower and lender assess IPO investing opportunity carefully after scanning through the historical data and market trends, grey market premium and issue subscription detail. Listing at a discount for the IPO issue will magnify the losses for investors.

Also, investors do not know exactly how many shares will be allotted. There is always a possibility that investor does not get enough allotment of shares even if the share gets listed at a premium. In such cases also, there is a chance that the borrower will have to book losses. Assessing the various aspects of IPO funding, this financial instrument can be said to be a good friend of HNI investor who is market savvy and has a very good understanding of how equity market performs and the risks involved. IPO funding is for high-risk investors and definitely not for risk-averse investors.

Munish Aggarwal
Director - Capital Markets, Equirus Capital

IPO financing as a product is an interplay between the investor's expectation of post-issue performance, over-subscription levels and cost of such borrowings. The investor pays for the funds borrowed for the 8-10 day period and expects that the gains on shares allocated to him in the IPO will be higher than such interest. Depending on allotment to the investor and listing gains, the investor either makes money or loses money. There have been instances where, despite strong listing gains, the allotment was so small that investors who had invested through IPO financing lost money. We expect investors' interest in IPOs to remain high, which will drive oversubscriptions and thus the demand for IPO financing to maximize allocations. From supply perspective, there has been a revival in the product, both in terms of NBFCs offering the facility as well as the cost of funds.

Amisha Vora Joint
MD, Prabhudas Lilladher

We are seeing more investors opting for IPO financing. Since the D Mart IPO (March 2017), the number of IPOs as well as the expectations of investors and the expectations of promoters and merchant bankers, all have increased. The investors who had burnt their fingers in IPO financing in 2007-09 are not yet convinced, but new investors are entering into the fray, buoyed by the listing gains. Since the D Mart IPO, there have been significant listing gains for IPOs, e.g.: CDSL (75%), Shankara Building (37%), AU Small Finance Bank (51%) prompting more and more investors to avail IPO financing.

Dinesh Thakkar
CMD, Tradebulls Securities.

Do you think the IPOs will suck liquidity from secondary markets?

To a very small extent. However, since the secondary market is trading at an all-time high, investors will be reluctant to divert money from secondary markets to primary market. Previously, we have seen when secondary market is in consolidation zone and with any popular upcoming IPO, liquidity would have been sucked from secondary market, but now we are seeing less and less of that.

Would you recommend investors to go for IPO funding considering that most of the IPOs are getting listed at impressive premiums? 

Yes, we would recommend investors to go for IPO funding. Recently, we have seen many of the IPOs getting listed at impressive premiums primarily because of buoyant secondary market and because of good prospects of the listed companies. However, we would advice investors to check for price and peer valuations. Factors like past performance and growth prospects will offer valuable insights in identifying good IPO. 

What percentage of capital portfolio do you recommend to investors for IPOs? 

Ten percentage of capital portfolio is what we would recommend to investors for IPOs. Remember, investors can also pick good stocks from secondary market once the hype generated by the IPO fades and the stock is trading at decent valuation. 

Do you see fresh set of investors coming into markets due to IPOs? 

Yes, we are seeing fresh set of investors coming into markets due to IPOs. In fact, because of stellar 2016 IPO performances, we have seen CDSL reporting 13 per cent growth in demat accounts, suggesting new investors being attracted by the IPOs. 

Pankaj Karde
Head- Institutional Sales & Sales Trading, Systematix Shares

Do you expect the primary markets (IPOs) to suck liquidity out of the secondary market in coming months? 

The market is flush with liquidity and I don’t think that IPOs will suck out liquidity. The domestic inflows are very strong and there is a shortage of good quality stocks. The IPOs will enable the funds to invest in new ideas.

Can you say that IPOs this year have revived the retail investors' sentiments? 

I can say that lack of other investment avenues have revived retail investors' sentiments. Also, due to the bull market scenario, IPO companies with good growth visibility have received premium valuations. Not all IPOs have received block buster response. Listing gains in growth companies is the major reason for revival of retail investors sentiment.

Are rich valuations a concern for IPO investors as well? 

IPO investment gives institutional and long term investors sizeable investment opportunities. Rich valuations are not a concern if the company can provide good topline and bottomline growth. Good companies with good financials

Would continue to get rich valuations.what are the key risks for the equity markets at this juncture? 

The most important risk to equity markets is slowdown in domestic flows. All geopolitical risks would be taken care of as long as domestic liquidity is strong.

Would you recommend IPO funding for investors? 

I don’t really recommend IPO funding for investors. IPOs which are good have seen multiple times subscription, making IPO funding unattractive. IPOs which are anyways not good should be completely avoided. 

Conclusion 

IPOs will remain the darling of retail investors owing not only to the recent decent performance, but also because of lucrative IPOs in the pipeline this fiscal.

The issue with investors' participation in IPOs is that if the issue is of good quality, there is huge participation from both retail and institutional investors. Hence, in the end, the allocation of shares is minimal due to oversubscription. So the problem is that investors do not get decent allotment for good issues, and for not-so-good issues, investors do not want any exposure. How does anyone make money in such a scenario. Here is where the IPO funding can be used intelligently by investors to improve their chances of allocation and to make some money by using flipping strategy. However, even when one is adopting the IPO funding route for participation , in cases of IPOs getting huge response, the break even point is pushed higher, thus making the whole game riskier. IPO funding can be used when there is reasonable data (subscription) to support the success of the IPO and the risks are fully known by the investor.

Investors will have to take a portfolio approach and decide on how much funds should be allocated to IPOs. In a bull market scenario, the opportunity cost of parking funds in IPOs goes up and no investor can afford to have his capital blocked in an unproductive manner when the stock prices are appreciating. IPO investing needs to be done carefully and should involve considerable amount of basic home work.