It is important to note that before being listed, these IPOs are traded on the secondary / gray market, a unique opportunity to see what that list looks like. In the general scenario they trade with some premium, which mirrors the market perception for the relevant stock. In the 90 days of 2021, a total of 16 companies raised money from the Indian capital markets through IPOs. To give you some perspective, in the year 2019, a total of 16 companies are listed. The issue size for the year 2021 is higher than for 2019 ₹2,314 crores. There must also be a reason for the devastation wrought by the Kovid-19 epidemic in 2020. These are naturally de-rail plans for many companies that aim to be listed in the relevant year.
While it is a pleasure to have new ventures listed on the Exchange, market participants should consult them practically. Speaking of policies in the context of IPOs, the Gray Market Premium (GMP) is a widely used parameter, mainly for retail investors to assess the possibility of a particular name. Before going any further let’s understand the concept of GMP. For example, if the company has an issue price ₹100 and gray market premium ₹15, which indicates that market participants are willing to buy these shares ₹115. In other words, the company is prescribing a 15% premium. It is important to remember that premiums are specified in nature and do not reflect the actual price.
If one does the math, gray market premiums and inventory profits are strongly correlated. However, a higher premium does not guarantee a higher return for investors in the long-term scenario. Let us understand this with the help of an example. The gray market premium is 92% of the one percent gray price of MTAR Technologies Ltd. and 43% of Hernaba Industries Ltd. Subsequently, their inventory gains were 89% and 44%, respectively. Now, the catch is with the subscription numbers. The former has been subscribed nearly 200 times, while the latter has been subscribed 83 times. Therefore, the basic argument is that, on a net basis, the retail investor is not in a position to derive external returns from inequality.
To further embody this idea, let’s look at a two-year IPO called Ujjivan Small Finance Bank. It was listed on the exchanges on December 12, 2019. It achieved pretty much inventory gains of 51%. However, as of April 1, 2021, it is trading at prices lower than its issue price. Evidence that the investor’s decision to rely on GMP numbers is not very rewarding. If not in the stock markets and in life, it is very necessary to have a set of rules and play by it. The more you hurt the previous ones, the more complicated your outcome will be.
As far as my calculation is concerned, there are a few basic things that ideally dictate the decision to apply for an IPO.
a) Business trench is your true premium: The main thing you need to look at is the quality of the business and then any competitive advantage for them. A good quality company may not order pretty much list profits that day but can be a valuable choice for the long-term horizon. Similarly, for a poor-quality name. Therefore, it is very important to understand the business
B) Sector wide vessel: Careful assessment of the sector in which the company is operating is required. I have often mentioned that those who assess the potential of a sector and catch it at the reflection stage are outliers. Estimate and call calculated about the future of the place
C) Myopic vision reduces your ups and downs: The reason I say that is the glorious idea of a list of benefits. There is no doubt that it works for some stocks and it will continue, but the idea is to catch outliers. Need to zoom out from the quick buck intent and have a wider horizon
The IPO we are currently seeing from the context of Indian markets is a positive sign of hunger. New and different companies not only bring opportunities to investors but also give diversity to the market. The idea is very simple forward. And keeping things simple. We do not fail to recognize the potential cost of a missed trade. In the stock markets, it is not the unknown who loses, but the late knowers. Regardless of all the analyzes you do, the thing to keep in mind is-
‘The price you pay, the value you get’, Warren Buffett.
Nikhil Kamath, co-founder and CIO, True Beacon and Zerodha