It is important for an investor to understand the core focus of a company. The business model of the company and the manner in which it generates revenue should be clear to the investor.
With prominent startups going public the Indian market has finally caught the IPO fever. In a short tenure, companies like Paytm, OYO, Pepperfry, Mobikwik, Zomato, etc. all came out with their IPOs. Experts say this has brought a shift in the investors’ mindset and led them to increase direct private investments.
Having said that, the pandemic induced lockdowns and the adoption of work-from-home has given people more time to research deeply about investing in stocks and mutual funds. Instead of spending on travel, restaurants, cinema, luxury purchases, etc. like before, industry experts point out a large section of the urban class is saving a lot more money than before.
Reports also chart out how people have invested in various wealth products on the platform over the last year. With digital platforms, one can invest in products easily including in Direct Mutual Funds, Stocks, IPO, F&O, ETF, NPS and Digital gold on the platform.
Products that have gained favour among millennials have been IPOs and Exchange Traded Funds (ETFs) along with mutual fund SIPs. Based on the series of new product launches like Stocks, IPO, ETFs, Digital Gold etc., the average ticket size of a transaction has holistically gone up according to various industry data.
Things to keep in mind while investing in IPOs;
Business model and core focus – It is important for an investor to understand the core focus of a company. Arshad Fahoum, Chief Product Officer, Market Pulse says, “The business model of the company and the manner in which it generates revenue should be clear to you. These are the basics, even before looking at projections of future earnings. If you can’t understand the core focus of the company, it’s prudent to stay away.”
Weighing in on the price of the Issue – According to Fahoum, assessing the valuation of an unlisted company is a complex task for an investor. Yet, he suggests, one should do the basic groundwork — evaluating the stability of the company’s financials, its liquidity situation and analysing any available industry comparables.
Market size, market share and growth metrics – Given the economic landscape of a developing nation like India, industry experts say one should identify companies staring at a strong growth trajectory ahead. For instance, Fahoum says “if an organised player strongly consolidating a fragmented industry, gets listed, there is high growth potential. If one can identify these aspects rightly, subscribing to richly valued companies during an IPO makes sense too.”
Don’t judge from the recent past – “The extended accumulation phase starting April 2020 and running through 2021, resulted in bumper listing gains for multiple IPOs,” points out Fahoum. While IPOs with strong fundamentals and competitive advantage will perform well in the future as well, experts say it would be unwise to expect a repetition of listing gains seen in 2021, if a listing takes place when the broader markets lose steam.
Don’t subscribe based on the Grey Market Premiums or the hype – In the long run, Fahoum says, “a stock’s price will largely be driven by its fundamental strengths, market cycles and the demand-supply equation. Before subscribing to an IPO, comprehensive analysis of the DRHP, the company’s financials and various risks, is a must.”
He further adds, “Solely subscribing to an IPO based on the GMP or the surrounding hype isn’t the right approach, and the Paytm IPO is a fine example.”