INITIAL PUBLIC OFFERING (IPO) 2021
An initial public offering is a process through which a private company goes public , that is , issues shares for the first time in the primary market. IPO allows the company to grow, expand and raise capital. Before the IPO, a company has very few shareholders including founders , family , friends, professional investors, anger investors and venture capitalists. Typically a company decides to become a publicly traded company when it has reached the stage when it can comply with rigorous SEC regulations along with benefits and responsibilities of public shareholders. Here we will study about basics of IPO, IPO investment and valuation.
Basics of IPO
Basic terms -The company which issues shares to the public is referred to as the issuer and the price at which one share is issued is the issue price. There are two common types of IPO.
1. Fixed Price IPO – Fixed price IPO refers to the issue price that some companies set for the initial sale of their shares.
2. Book Building Offering- The company initiating an IPO offers a 20% price band on the stocks to the investors. The interested investors bid on the shares before the final price is decided.
1. Hiring Of An Underwriter Or Investment Bank-They act as intermediaries between the company and the investors and lead the process. The underwriting agreement has all the details of the deal, the amount to be raised, type of securities, offer price etc.
2. Registration For IPO- It includes filing the registration
statement(fiscal data and business plans) and drafting the red herring prospectus
3. Post verification by securities exchange board, the company applies to stock exchange for floating its initial issue
4. Pre-marketing phase of the offering
5. IPO is priced and shares are allotted.
INVESTING IN IPO- Interested investors can apply through a brokerage firm or mutual funds that focus on IPO’s. Investors are qualified into
a) Qualified Insititutional Buyers (QIBs)
b) Non Institutional Investors (NIIs)
c) Retail Individual Investors (RIIs)
Advantages and Disadvantages of investing in IPO
Advantages of IPO :
- High returns
- Listing gains
Disadvantages of IPO :
- Volatile Prices
- Expensive and time consuming
- Relatively new company
By investing in the right company, one can expect good returns in the long run. IPO’s are a great opportunity for investors with high risk appetite.
IPO VALUATION– It is imperative to correctly estimate the IPO both for the company as well as the investor. Underpricing IPO can lead to huge losses and if it is overpriced, insiders would not subscribe. The various factors that affect IPO valuation are:
1. Demand –High demand increases the stock price, but does not essentially mean the company is more valuable.
2. Industry comparables- If the company is in the field that already has comparable publicly traded companies, the valuation will be influenced with direct competitors.
Qualitative- Other factors like growth prospects, management, nature of business also play a crucial role in IPO valuation. For example, in 2000s technology stocks were trending due to boom in IT industry and thus demand was higher.
Absolute Valuation- The bankers analyze company’s fundaments using Financial modeling (discounted cash flow analysis / DCF analysis), comparable company analysis and precedent transaction analysis.
Relative valuation- Issue price can also be determined by comparing the value with similar companies.
UPCOMING IPO’S 2021
According to PTI , IPO market was the busiest in FY’21, In midst of COVID-19 second wave, pharma companies remained great performers. At the moment, 17 companies have filed their prospectus with SEBI to raise over ₹40,000 crore.
List of upcoming public issues in 2021:
∙ Zomato: The Foodtech platform filed its draft red herring prospectus (DRHP) proposing an offering of ₹8,250 crore
∙ GoAir: Wadia Group-controlled Go Airlines (India) Ltd filed a draft prospectus for an initial share sale to raise up to ₹3,600 crore.
∙ Nuvoco Vistas: Nirma Group’s cement company, Nuvoco Vistas Corp plans to raise Rs5,000 crore through the IPO.
∙ Aditya Birla Sun Life AMC: The AMC had filed the IPO papers in April. Aditya Birla Capital will sell up to 2.88 million shares held by it in the asset management business, while Sun Life (India) AMC will sell up to 36.03 million shares.
∙ Glenmark Life Sciences: The IPO will consist of a fresh issue of ₹1,160 crore ∙ Medi Assist: Bengaluru-based Medi Assist Healthcare Services intends to raise ₹850 crore completely via OFS.
∙ Penna Cement: The ₹1,550 crore IPO comprises a fresh issue of ₹1,300 crore and an offer for sale of up to ₹250 crore by its promoter PR Cement Holdings Ltd.
∙ Aditya Birla Sun Life AMC
∙ CarTrade: The online auto classifieds platform plans to raise ₹2,000 crore via offer for sale (OFS)
∙ Devyani International: Food and beverages major Devyani International, the largest franchisee of Pizza Hut, KFC, and Costa Coffee aims to raise nearly ₹1,400 crore through the IPO
Other companies like Windlas Biotech, Aptus Value Housing Finance, bulk drugs firm Supriya, Chemplast Sanmar, Shriram Properties, India Pesticides also filed their draft papers last month. According to media reports, Life Insurance Corporation of India (LIC), Bajaj Energy, Nykaa and others are also expected to go public in 2021