What you should look for when considering investment in an IPO

 

What you should look for when considering an investment in an IPO?

IPOs in India have always attracted a lot of investors for example the recent listing of burger king was at a listing gain of 130 per cent it means those who invested rupees 15 000 in burger king saw their investment value jump to rupees 34 500 giving rupees 19500 on the first day as profit that's more than double the return similarly

The happiest mind gained 111 per cent on the first day so those who got the shares of the IPO were sitting on hundred and eleven per cent profit on the first day 

Likewise, camcomb speciality chemical was listed at a premium of 115 per cent over its issue price, rosary biotech started the first trading day with a whopping 57.65 percent premium over its IPO price 

Route mobile was listed at 104.86 premium over its issue price naturally this is easy money, but it is important to understand that not every IPO would be listed at such high premiums, there can be a case where the IPO gets listed at lower than the offered price giving a negative return 

Naturally, you would like to invest in those companies where you can get high listing gain and you would want to avoid companies that might not give a good listing gain 

Now the biggest question is how to identify if the company can generate good listing gains on the first day of listing 

So there are two options to decide if the company can give a good listing gain or not.

The first option is to do a detailed analysis of the company where you understand the business of the company its competitive strength key risk future growth prospect of the industry and the company and finally you check the financials including the historical growth profitability and valuations 

But that requires a lot of time energy and knowledge now what if I tell you that you can decide within five minutes if the company would give a good listing gain or not 

Guys I am serious you can actually identify in just five minutes whether the company would give good listing gains or not you just need to do three steps so let's look at each step 

Check the grey market premium of the company companies with a good premium in the grey market would give good listing gains for example the grey market premium of burger king was 85 which means burger king price was trading at 85 per cent profit before the IPO listing and what was the result on a listing day it was launched at the premium of 130 per cent 

Now what is grey market premium a grey market is a place where company shares is bid and offered by traders unofficially this takes place before the shares are even listed or issued by the company on an initial public offering 

So it is an unofficial market please note that it is not illegal it is completely legal since this is an unofficial market there are no rules and regulation 

Market regulators like Sebi are not involved in this transaction so the first step would be to check the grey market premium you can simply google the name of the company and use the keyword grey market premium and you will get the details 

For example, if you simply search burger king grey market premium then you will get various links so you can click on the various links and see the grey market premium for example if we click on this you can just scroll down and you can see that it says that as expected the price band is fixed at 59 to 60 so we can expect a good grade market premium for the IPO 

The grey market started with a good note around 28 to 30 and going up and settled around 40 to 45 level likewise there is indigo paint IPO that is in progress 

So if you just search indigo paint grey market premium you can see various links so you can click on that link you can see it says indigo paint share for commanding a grey market premium of rupees 895 to 900 or 60 per cent at rupees 2390 a piece over the issue price 

Sheck the brokerage houses report now there are many brokerage houses that suggest if you should subscribe to the IPO or not you just need to search the company name and use keywords like brokerage house report or you can be even specific for example some of the common brokerage houses include Motilal Oswal, ICICI Security, Anand Rati,  Angel Brooking IIFL etc 

So you can type the company name followed by the brokerage house name these are the companies that do the in-depth analysis and provide a recommendation if the majority of brokerage house suggests a buy then there are high chances for the listing gain.

If you simply search burger king IPO broker report then you will get various links so you can scroll down and see for example here in this particular economic times article if you click on this you will see various brokerage house recommendations for example has said subscribe 

I say security said subscribe likewise you've got various brokerage house recommendation like choice broking prabhutas leeladhar jioji financial services kr choxi etc now this is the final step you need to do where you can check the subscription status during the three days of IPO application so normally if the company is expected to do well there would be a good subscription on the first day itself you will get three days to apply for the IPO

So you can invest on the second or the third day on the basis of IPOs subscription status the more the subscription the better would be the listing gain chances again you can simply google the company name followed by the keyword IPO subscription status and you will get the details 

So if you simply google let's say happiest mind ib subscription status then you can see various links now if you scroll down you can read happiest mind IPO  subscribed over 150 times likewise you can search let's say indigo paints IPO subscription and if you scroll down you can see that it says indigo paint IPO subscribed over 50 times so far on the final day 

so if we conclude for the IPO to give potential listing gain it should have a high-grade market premium subscribe rating from multiple brokerage houses and finally high subscription during the three days of IPO application, so next time you apply for the IPO make sure that you apply these three steps that we discussed in the blog 

But there is only one problem if an IPO has a high grey market premium and multiple subscription calls from various brokerage houses there will be a multi-fold subscription for the IPO during the three days of the application window and in that case, it would be a lottery system 

So higher the subscription lower would be the probability of you getting the allotment but there is no harm in trying the luck isn't it 

By the way, if any one of you know the secret formula to get the allotment lottery in case of multiple times subscription then please share it in the comment box and did you make a good profit in the previous IPO allotment do let me know in the comment box 

Finally please note that this formula is only to identify the IPOs with potential listing gain it is not for the long term investment for long term investment you need to do the fundamental analysis.

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