Sunday, September 20, 2009

Invest in IPO based on fundamentals

The stock markets are on a roll amid positives such as revival of the monsoon, strong global cues and improved industrial production numbers. The advance tax numbers and excise duty collections also indicate that the quarterly performance of most companies would be better than expected.
The upbeat secondary market has had a rub-off effect on the primary market. Promoters who had postponed their initial public offer (IPO) plans last year are now looking at taking advantage of the renewed positive sentiments.

A good part of the year 2008 saw lack of interest in equity due to poor investor sentiments and declining markets. The IPO market thrives in a rising secondary market, hence the better part of 2008 hardly saw any major IPO issues.

The trend is changing now and there have been some big IPOs hitting the market in the past few months, and there are more in the pipeline. Although the subscription numbers have been good for the recent IPOs, the individual investor interest is still low in comparison to the institutional and high net worth segment.

So, is it a good time to invest in IPOs?

Investor or trader?

An investor in an IPO is someone genuinely interested in the company and intends to hold the shares for a medium to long term. A trader would subscribe to an IPO with the intention of making gains on listing.

While subscribing to an IPO, it's important for you to be clear about whether you are considering the company's future prospects or if you are betting on the entire buzz around the IPO to make a quick buck on listing.

As an investor, you have to study the track record of the company and pricing of the issue. As a trader, you have to be ready to get out of the stock whether at profit or loss since your intention was not to hold the stock. Getting out may become more difficult later if the stock keeps losing after listing

Many subscribers to an IPO, usually the traders, borrow money to invest in the IPO in order to maximise gains. In such a case, an IPO would have to list at a price higher than the issue price plus the interest cost in order to make a profit. With margin funding you make higher profits if the IPO lists well.

On the flip side, if the IPO falls below its issue price on listing, you would lose a good part of your investment due to the loss on listing as well as the interest cost.

Study prospects :

As an investor in an IPO, it is extremely important to understand the business of the company and how it compares with its peers in the industry. The track record of the management, past performance of the company, risks that the company faces and the purpose of raising finance along with expected returns on investment are other crucial factors to be considered. The grade given by the credit rating agency may also be a good indicator about the company's prospects. However, grading does not indicate if the issue is priced at a fair level.

Evaluate pricing :
A company may have good prospects but if all the positive factors are priced in completely, there may be little scope for the price to appreciate after listing. Also, an over-priced issue, however good the company may be, may correct to its fair price eventually.

By comparing the pricing with respect to peers in the industry, you may judge if the issue is underpriced or over-priced.

Finally, avoid falling prey to all the buzz and market stories. Also, over-subscriptions do not indicate that the listing price will be high, so steer clear of all such myths. Investing in an IPO is no different from investing in a listed company.

All aspects of analysis and basics of investing should be applied to an IPO and you should subscribe to it only if the rational investor in you gives a go-ahead.

Courtsy: economictimes

No comments:

Popular Posts