Do you know what companies like Nykaa, Paytm, Zomato, Bajaj Energy, and Aditya Birla AMC have in common apart from ruling the Indian market in their respective fields? That’s right! In this financial year, all these brilliant firms have “gone public” and listed themselves on the Indian stock market.
There are hundreds of companies that trade in the National Stock Exchange and the Bombay Stock exchange. From the leviathan Reliance and Tata to the smaller new ones. Every single one of them had to start somewhere. The trading life of each one of these companies was bought into existence by an “Initial Public Offering” or IPO. When a company starts offering IPO, it shifts from being a private limited to public limited company, attracting investors as well as massive capital.
This year was robustly carried by prolific liquidity and motivated investors. Newly listed firms have raised a promising capital of more than 30,000 Crores in terms of initial public offerings. This has been the highest in at least a decade. With a great number of companies lining up on the market this year, you can call it a jackpot for investing in IPOs for Indian Investors.
Before an IPO the company is owned privately by the owners and close members who invested in the company while it started, including some employees in some cases. The founders raise capital and share ownership amongst these members at first because they are aware that in case of failure the after-effects won’t be devastating. If the company succeeds in this small endeavor, they decide to go public and a stock that cost nothing and did not even exist a day before will have value in today’s market.
All of this sounds pretty sorted and simple, right?
Things to care of before Investing in an IPO
Here are a few things you must consider before indulging your finances in the world of IPO concerning the Indian market…
Firstly, understand the business. Before investing you must understand the nature of the business the company is involved in. After this you must recognize the upcoming opportunities in the current market, The greater the opportunities, the better the chances of returns. Never invest in the IPOs of a company with unclear plans and methods of functioning.
Secondly, be clear with your plan of action. By this I mean, you must be aware of what you will be doing with the IPO. Are you willing to make a short-term profit from it… or do you plan to hold it and invest your money in the long term? You must have clear answers for this as they will help you in making lucid decisions.
Thirdly, read the draft Red Herring prospectus. This is a document that is provided by the firm to SEBI and talks about the plan of action that the company has after it goes public. It talks about the methods that the company will opt to use the capital raised from the public and the returns it will offer.
Apart from these major pointers, you must also consider the following. You must analyze the performance of the company in the market and study how the company will perform in the upcoming fiscal year after buying its IPO and make appropriate decisions based on the company’s performance. Reading the Red Herring prospectus will help you figure out the risk factors and the presence of contingent liabilities that can lead to the eventual doom of the company. You must know that if the company states that it intends to repay its debts by going public and raising capital you must be aware and try avoiding such companies. They may not hold a promising future and will break even frequently for a long period.
How are companies valued after IPO?
Now let us take a look at how a newly formed stock gets its value. After a company is listed publicly, its share price is solely based on the demand and supply of these shares in the market. If there is a high demand for a stock, we see that its price tends to increase. There is the concept of price to earnings ratio and it theorizes that any share price is simply a multiple of the company’s profit share. It is found by dividing the proposed price of the issue by the earnings per share.
All you need is a Demat account, the number of shares you wish to buy, your personal details, and your bid price. If you are lucky enough… you are allotted an IPO and you are informed about the details within 6 business days.
Back in the day when Reliance, Tata, MRF, and other giants were new to the stock market, these companies started slow and were valued at a very low price. Yet today they stand tall and act as the pillars of the stock market.
Having a good sense of timing always helps with the ability to take risks because as they say, “Risk hai toh Ishq hai!”
Here is a list of upcoming IPOs in the coming few days:
- Go Fashion (India) Limited Co
- Tarsons products Limited
- Emcure Pharmaceuticals