The flood of IPOs in 2021 has been historic.
First there were blocks like IRFC, Kalyan Jewelers and Brookfield REIT. He set the trend at the beginning of the year to follow the mega IPO.
Then investors went crazy about Zomato and Power Grid InvIT in the middle of the year.
Finally, Nykaa, Policy Bazaar and Paytm completed the frenzy by the end of 2021.
In between, some big IPOs hit the market. Marcotech Developers, Aditya Birla AMC, Sapphire Foods, Chemplast Sanmar, Nuvoco Vista. All of these attracted investors to varying degrees.
It is estimated that the funds raised by all these new public issues will exceed Rs 1 trillion this year!
2021 was indeed a record breaking year for IPOs. But what about 2022?
If you’re looking to make big money from an IPO next year, this editorial is for you.
What will be the big IPOs of 2022?
As per the news in the last week of December 2021, 4 big IPOs are in line for 2022. These are widely anticipated by investors.
Life Insurance Corporation of India (LIC)
Of course it is the biggest.
The latest news is that the company and its investment bankers are slashing the valuation of the IPO. It is expected to hit the market in the January-March quarter.
This IPO is also important for the government. The IPO fund will help it achieve its fiscal deficit target.
There has been a lot of discussion about this IPO and it is being widely speculated.
India’s largest edtech firm is reported to be in the pre-IPO stage. The market is expected to file its IPO documents with the regulator after the end of the financial year. The IPO could hit the market in the middle of 2022.
India’s largest ride-hailing aggregator is also looking to launch an IPO next year. News reports say it is looking for a valuation of around US$12-14 bn.
Ola differs from most tech startups in that it is profitable. Its IPO is sure to get a good response in the market.
This could be the first of the big IPOs of 2022. The company has already filed its IPO papers with the market regulator.
The size of the IPO could be around Rs 50 billion.
These are just big. There are others like MobiKwik, which may hit the market in 2022.
As long as the market sentiment remains strong, we can expect another flood of IPOs just like in 2021.
So what’s the best way to profit from these IPOs?
A different way to get profit
Most people, when they discuss making money from IPOs, are only interested in listing the benefits.
And it’s understandable. Many IPOs have given good returns on listing. Since there is only a few days gap between applying for an IPO and booking profits, this is an attractive bet.
But there’s a better way. It is also possible to make more money by listing the profit with less risk.
Think of IPOs as Unlisted Businesses
The management of a first time marketer will have to change the way they run their business.
After an IPO, they are responsible for thousands, even millions, of individual shareholders.
They must expose the company to a high degree of public scrutiny from investors, regulators and the media.
They have to be much more transparent than before in terms of providing information and disclosures.
They have to comply with many more rules than before as an unlisted company.
All this requires a major change in mindset.
And to be honest, most of the people running these firms are not up for the challenge of day one.
They were only interested in raising money from the public, not in taking care of their own interests.
So you see fall in share prices of many newly listed companies after IPO. This is because the market finds out what management is all about.
Now this is the important thing…
This can’t be a bad thing. Sometimes the management needs some time to get up to speed with the new reality of being a listed company.
Investors may not always be right in blaming management if the stock price falls after listing. It may be a case of misplaced expectations.
This is why it is best to think of a newly listed company as an unlisted company.
They can be listed but they will need time to start working as a professionally managed company.
In the interim, the share price may move up or down or sideways. No problem. If you’ve invested in an IPO, take the time to understand how management is trying to handle this change.
Are they clearly stating how the IPO funds are being spent? Are they allocating money wrongly?
How are they implementing their plans to improve the company’s sales and margins? Will the future be better than the past?
If the management made any short-term promises after the IPO, did they keep their word?
Don’t take management’s words at face value. Check their words by their actions. Did he keep his promises? If not, why? Are they trying to move target positions?
Remember to still think of it as an unlisted company.
This will give you an idea of how responsible the management is with your money.
If they don’t behave in an ethical and professional manner, your choice is easy: sell the stock.
You may suffer loss. Maybe their stock has crashed. Yes, it is possible but it is better to get out at that time.
On the other hand, the stock could go up.
That’s great. But you should still sell.
Sooner or later, the market will wake up to the fact that the management is not trustworthy.
What if you find that management is doing a good job?
In that case, assuming the stock isn’t too expensive, consider adding to your position.
Don’t forget to maintain a good asset allocation at this point of time. Don’t put all your money in just one or two stocks. Here is Equitymaster’s recommended asset allocation based on market cap.
How Long Should You Hold IPO Stocks?
Well there are really very few good stocks that you can keep forever.
Thus, don’t be surprised if you find that you may have to sell your IPO investment sooner than you expected.
Here’s the important thing…
In the long run, it’s very likely that your IPO investment, regardless of the initial hype, will end up as just another common stock.
In other words, the only things that matter in the long run are the bread and butter fundamentals – earnings growth, return on capital, sales, margins, cash flow, dividends, etc.
This is the reason why you should consider booking profits if your IPO investment beats your return expectations.
We recommend that you follow this simple checklist.
Is the management working as promised? yes no?
If not, sell.
If yes, check the share price and apply point #2.
Has the stock outperformed your expectations? yes no?
If yes, book partial benefit and repeat #1 after 6 months to 1 year.
If not, hold #1 for 6 months to 1 year and repeat.
That way you’ll reduce your risk significantly, while any gains you make will be based on how management is adapting to the new reality of being in charge of a listed company.
It is a better way to invest in IPO only from the point of view of listing profit.
We hope this innovative way of investing in IPOs will help you build a more stable asset from low-risk IPOs.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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