Loaded investors and niche firms keep IPOs shining

Going by the listing-day euphoria of recent new share sales, the rest of fiscal 2021 promises to be a busy period for more IPO hopefuls with many more companies expected to go public over the next six months. Mint looks at what lies ahead.

Why are IPOs getting good market traction?

Despite the 24% contraction in India’s GDP in April-June and the sharp rise in covid-19 cases, stock markets are flush with liquidity. The Sensex bounced back by over 40% from multi-year low of 25,981 points on 23 March when it crashed by 3,935 points, and continues its uptrend with low volatility. Typically, the primary market follows the secondary market. That is why IPOs are hitting the market so frequently. Several firms had to keep their IPOs on hold due to curbs. High grey market premium has also been a key factor behind the euphoria in the crowded primary market.

What is listing pop and how is its pricing key?

Listing pop is the percentage gain that the stock witnesses on the day of listing as compared to the price at which the share was allotted in the IPO. This is the money the company leaves on the table for IPO investors, most of whom tend to encash their investment on the listing day. IPOs are priced in such a way so that they go up by 15%-30% on the first day of trading. The lower the pricing, the better the prospect of a listing pop.

Worldover, as part of effort to combat covid-induced slowdown, central banks have infused liquidity into the system. This money is looking for growth areas and Indian firms provide that.

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Listing frenzy

Will IPO market continue to remain  vibrant  going  ahead?

As long as pricing remains fair, listing pops will be large and the public’s confidence in the IPO market will be enhanced, which in turn will increase the prospects of upcoming IPOs. It will also be crucial for companies to showcase their resilience to the pandemic. A recent phenomenon has been one of young people directly taking to equities in a big way.

What  should  one  check before IPO investing?

Return on equity, operating profit margin, and price to earnings ratio are key parameters in fair price discovery of a company intending to launch an IPO. Bankers often price an IPO by comparing these factors to the company’s peers in the listed space and by keeping in mind a large pop, mostly linked to the demand of the stock. As long as global liquidity provides a cushion to stock markets prospects of IPOs, gains will remain fair. However, if liquidity, demand for company’s business and key financials are not considered it may lead to losses.

What themes are doing well in IPOs?

Fintech, digital services firms, pharmaceuticals, health and personal/home care-related companies are clearly the flavour of the season. Investment avenues like real estate are no longer providing adequate returns. Covid has played a role in another way where investors are looking for companies that ride on digital platforms or are operating on areas which are less exposed to disasters. Bumper subscription of IPOs like those of Happiest Minds, Route Mobile and Rosiary Biotech are examples of that.

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