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In and out of IPOs Author: Samarth Choudhary | Date: March 3, 2021 | Read 4 min.

While we live in a VUCA ( Volatility, uncertainty, complexity, and ambiguity) world, and are surrounded by these characteristics in all facets of our lives. These traits have always been embedded in the stock markets and their investors alike, thereby making it difficult for them to make consistent gains. However, Initial Public Offerings (“IPOs”) present a great alternative to invest in the financial markets.

An IPO,  as the name suggests, is the first time a privately owned company issues shares to the public for them to be traded at one or more stock exchanges. A company may decide to go public for several reasons, viz.

  • To raise new equity capital
  • Monetize the investments of promoters or private equity investors;
  • To repay debt and improve financial leverage;

To fund capital expenditure, etc. One MUST perform their own due diligence before investing in IPOs – “Mutual Fund investments (read as IPO vestments) are subject to market risk. Please read the offer document (read as Draft and Red Herring Prospectus) carefully before investing.”

However, looking at the health of the IPO market, in India, it seems that investors are ready to undertake risks. In 2020, we saw a whopping 15 out of 16 successful IPOs, despite the on-going effects of the pandemic, with total money raised amounting to Rs. 26,628 crores, more than 2x of the amount raised by companies in 2019.

The Indian economy is reflating at a pace that beats most predictions and is recovering faster than expected. The hold back in the second quarter of 2020 was much shallower than the first with financial savings of corporations and households have seen a rise. These are funds waiting to be converted into productive investments rather than keeping them in one’s tijori.

So, one might wonder why are IPOs on the rise, much like the unending number of Covid cases?

Logically speaking, a company goes public with the hopes of raising capital to primarily fund future business expansions. Naturally, growth opportunities exist in all sectors, however, according to this article, Consumer Goods (aka FMCG), Pharmaceuticals, E-Commerce, Automobiles (incl. components and OEMs), and Information Technology are going to be amongst the biggest winners in 2021.

While there are going to be winners and losers in these sectors, it is important to select that winner via IPO. One of the key challenges in selecting the winner is dearth of information pertaining to these companies which are hitting the public markets. While SEBI has made it mandatory for these companies come out with a

Red Herring Prospectus (RHP) which provides risks of the company, industry characteristics, company financials and other important details. Therefore, it is important to go through the RHP before investing. Below mentioned are some pointers to be analyzed to gauge a winner:

  1. Growth Trajectory – Top-Down Analysis is the key to identifying a successful company, whereby we are trying to evaluate the growth potential of the industry over the next few years. Thereafter, it trickles down to the specific company data where the RHP helps us to bridge that gap and allows us to read the financials as if its a listed company, and also provides us with a rough figure of what its value is likely to be. Strong historical track record does not guarantee future growth always!!
    Disclaimer – Albeit, for a private company, the level of information available is quite limited, and usually companies prior to IPO are in the survival and sustainability phase, it is going to be relatively harder to see a clear trend.
  • Company & Line of business – Usually a company does not come out with an IPO unless it believes there are growth opportunities in the industry, however, it is important to gauge the prospects and get an idea of where the industry is headed 3-5 years down the line, post issue. For example, the E-Commerce industry in India is expected to grow to $200 billion by 2026, hence, if there is a private E-Commerce firm looking to go public, it is safe to say that there are plenty of growth opportunities existing in the market.
  • Promoters & Shareholding – This is an important indicator of confidence. The Law requires the company promoters to hold 20% of the shares, POST ISSUE. So, one needs to keep a close eye on whether the IPO is for the promoters to exit their holdings, or they hold onto them – signifying confidence in the growth prospects of the company. Briefly put, the promoters’ intentions are of utmost importance.
  • Future plans & Risks – The RHP contains the direction in which the company plans to spend the proceeds from the IPO, i.e. whether it’s for investments in innovative technologies, entering new markets, or setting up a new manufacturing unit, or whether it is to repay borrowings. If the case is the latter – Run, Forrest, RUN!

Keeping in mind the above factors, amongst others, we can look out for the following IPOs in 2021 (in my opinion) – 

  1. Pavna Ind: The company is engaged in auto component manufacturing and marketing. The Automobile sector is estimated to grow to $300 billion by 2026, whereas the component OEM market in India is expected to reach approximately $100 billion by 2025.
  2. Sona Comstar: The company is one of the leading R&D and innovation-led automotive technology players, which designs and manufactures highly engineered, mission critical automotive systems and components. It is a major supplier to the global EV market, and is backed by The Blackstone Group.
  3. Zomato: Deepinder Goyal founded online food ordering company which is now valued at $5.4 billion after raising $250 million just before its IPO has proven its mettle in these trying times, without which we all would be binge-watching our favorite shows on an empty stomach. Some heavyweight investors are amongst the backers such as Fidelity Management, Tiger Global Management, Jack Ma owned Ant Group.

The IPOs listed above account for my personal views, and by no means should they be considered as investment advice. For those who want a comprehensive list of upcoming IPOs in 2021, take a look at this. You will find that there are multiple companies which have not been mentioned by me, merely because it runs into multiple pages!!
but it will behoove investors if they performed their due diligence before entering the markets.

Having said this, a vast majority of the retail investors conduct their trades and investments on the basis of ‘word of mouth’, and general blue-chip, dividend paying companies continue to be the darlings. While that might prove to be a safe bet, however, to betting on David amongst Goliaths is where wealth can be generated in the long run. The Draft Red Herring Prospectus, as dumb as the name sounds, is one of the best tools you will have to guide you through the unknown world of IPOs.

So read up, good luck, and wish you all a successful IPO fueled year.

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of any agency, organization, employer, or any company. Fintuned Co. LLP shall not be held responsible in any manner whatsover, for any decision/action taken by readers on the basis of the content mentioned in the article. Readers are requested to exercise their best judgement before taking any decision/action. Fintuned Co. LLP shall also not be held responsible for any copyright infringement committed by the author in the process of writing and/or publishing this article and in the event any such offence is found, cooperate with necessary authorities to take remedial action

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