IPOs are set to hit a record high this year.
With SBI Life Insurance’s billion-dollar Initial Public Offering
(IPO) slated to start on September 20, this year promises to be a blockbuster year for public issues. Thomson Reuters data indicates that 2017 is expected to be a record-setting year for IPOs, with fund raising predicted to exceed 2010's high of $8.5 billion. In the past two years, IPOs of Alkem Laboratories, Dr. Lal Pathlabs, Interglobe Aviation, Avenue Supermarts and Sankara Building Products have performed exceedingly well after their listings. “With the massive oversubscriptions seen in the retail and HNI segments, it is clear that the interest in IPOs as an asset class is back with a bang,” said Angel Broking,
a stock broking firm.
If you are planning to invest in an upcoming IPO, here are some key factors to look out for:
- Pick companies with focused business models: Ideally, while picking IPOs, put your money into companies which have focused business models and an established track record. They are more likely to work in your favour, Angel Broking advised, adding that an investor buys the business, not the stock.
- Check what the company wants to use the money for: Find out what the company is going to utilize the funds for. Raising an IPO for repaying debt is not a great idea because the cost of equity is higher than the cost of debt, Angel Broking said. One must put money in IPOs where funds are being raised for expansion, capital allocation or acquisitions that are genuinely likely to improve returns in the coming years, the brokerage firm said.
- Are promoters and early investors exiting? A substantial exit by promoters and anchor investors via the offer for sale (OFS) does not inspire confidence in investors and one must approach such IPOs with caution, Angel Broking warned.
- Read the investor document carefully: The prospectus is an important document and as an investor you need to go through it in detail. Firstly, check if the IPO is substantially diluting the earnings per share (EPS) of the company, Angel Broking said.
- Is the company positioned for growth? Do you want to hold on to the IPO stock? In that case, ensure that the company is in a sector with adequate growth potential, Angel Broking said. Also, avoid companies that have a huge debt burden. These are the most vulnerable to industry and macro shocks!