5 factors that contribute to a successful IPO…
How do you define a successful IPO? There are many ways to look at it, but there are basically two measurable criteria that you can use. Firstly, it is measured by the extent of oversubscription that you get for the issue. More so, if the oversubscription is spread across retail, non-institutional, and the QIB categories! The second criteria to gauge the success of an IPO are the post-listing performance of the stock. This has two aspects; the listing premium to the issue price and the stock’s consistent post-listing performance. What contributes to this IPO success? Broadly there could be five factors:
A lot depends on the timing of the IPO
Like it or not but the timing of the IPO matters a lot. If your IPO is bunched with a lot of other mega IPOs, then you need to be prepared for a tepid response. That is because the investable surplus of investors gets distributed across more IPOs. Secondly, it also matters whether the markets are in the midst of a bull rally or a bear run. This state of the market at the time of the issue and at the time of listing has a deep impact on the IPO’s success. In fact, we have seen quality IPOs getting tepid response just because the timing was not right. It also predicates on how IPOs are doing in a similar industry group. For example, if a steel IPO comes out when steel stocks are being battered by the commodity cycle, then prepare for a bad response and weak listing.
Is the IPO attractively priced?
This is a critical issue. In the initial phases of the IPO in 2016 and early 2017, the companies and the merchant bankers were pricing their issues competitively to leave a decent capital appreciation potential on the table. That is the ideal situation, and we have seen that happen in IPOs like Avenue Supermart and Shankara Building Products. When pricing gets too aggressive, as was visible in many insurance company IPOs in the recent past, they leave very little on the table for the investors. That works against IPOs.
Does the company have a unique business model?
At the end of the day, a unique business model does make a difference. For example, Avenue Supermarts had a different retail approach while Shankara was working on the convergence of retail and construction products. Such a unique positioning works positively in favor of a good stock response and good post-listing performance. Nowadays, investors are willing to take a greater degree of risk and buy into disruptive stories. The IPO seller needs to calibrate the story very effectively.
Is there a discount for retail investors?
This is a special benefit given not only in PSU IPOs but also in some private companies that promise a lower price for the retail portion of less than Rs.2 lakh investment. The idea is to encourage retail investors to participate in the equity market at a more reasonable price. In fact, the discount for retail investors is known to induce substantial demand and buying interest among retail investors.
What is the quality and profile of anchor investors?
Anchor investors are the company’s initial investors even before the company comes out with a public issue. High-quality names as anchor investors lend credibility to the entire IPO issue. Retail and institutional investors are more willing to commit money to the IPO if there are marquee names as anchor investors in the company. The pedigree of the anchor investors does matter a lot. However, investors do tend to be a little wary if the anchor investors are entirely exiting their stake or if the promoters are also participating in the OFS. Typically, investors tend to be a tad skeptical in such cases.