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Written by Awdhesh Nagar
Stock markets are driven by emotions in short run. Markets will always be at extreme and it is difficult to find justification for both rise and fall. Market has shown very strong growth in last 6 months.
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Especially midcap and small cap index which have grown by 36% and 40% respectively. Bull
market also brings with it good time for companies wanting to raise capital from markets. We have been seeing many IPOs (Initial public offers) in the market. Investors have shown huge appetite for these offerings.
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Historically more than 70% IPO trade below offer price after 1 year. But there are big success stories also, HDFC Bank, Infosys, TCS also came to market through IPO route. We have also witnessed investor loss in IPO like Paytm, Reliance Power etc. How do we judge an IPO? It is beyond a normal investor to analyse company and its business?
New age technology businesses are even more difficult to evaluate as there is no known valuation model for such big brand yet loss-making businesses. A simpler way is to look at past track record and age of business. Also how does it compare to peers in terms of valuations as there has been IPO sold at value even above market leader in the segment.
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A very important aspect to watch is whether it is offer for sale (OFS) or fresh capital infusion. OFS allows existing investors to sell their stake, it does not give any further capital to company, hence it does not enhance business. An IPO raising capital for expansion add to business of company. Investor needs to be cautious of utilisation of their money.
Few of the IPOs are combination of both OFS and new capital. In that case look at the amount raised for each of the purpose. Some of the IPOs raising fresh capital use funds for reduction of debt. This is not a good utilisation as no business enhancement will happen only debt will reduce hence no operation efficiency or size of business will improve.
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About Awdhesh Nagar: Awdhesh Nagar is experienced banking and finance professional. He has good knowledge of economics and business-related matters. He currently runs his own organisation by the name ‘finance edger’ which advises more than 300 clients on their personal financial planning.
Awdhesh is on mission to improve financial literacy. He considers himself responsible for financial wellbeing of his clients. In past he has worked with organisation like Citigroup, GE, Standard Chartered, SREI at senior level position Awdhesh has also worked for ‘Jaipur Smart City’ project of Government
of India’ as Financial Expert. He has handled investment, funding and project finance portfolio in these organisations. He regularly visits education institutes as guest speaker and provides his views on budget and economic events on media. Awdhesh has done his B.Com (H) from Sri Ram College of Commerce
and MBA-Finance from University of Delhi.