The flow of IPOs in 2021 has been historic.
The first blocks were those of IRFC, Kalyan Jewelers and Brookfield REIT. They set the trend early in the year for the mega IPOs that followed.
Then, halfway through the year, investors went crazy with Zomato and Power Grid InvIT.
Finally, Nykaa, Policy Bazaar and Paytm completed the frenzy by the end of 2021.
In the meantime, a number of large IPOs came on the market. Marcotech developers, Aditya Birla AMC, Sapphire Foods, Chemplast Sanmar, Nuvoco Vistas. They all attracted investors to varying degrees.
It is estimated that the funds raised by all these new public issues this year will exceed Rs 1 trillion!
2021 was indeed a record year for IPOs. But what about 2022?
If you want to make big money with IPOs next year, then this feature article is for you.
Let’s dive in…
What will the major IPOs of 2022 be?
According to the news in the last week of December 2021, there are 4 major IPOs lined up for 2022. This is widely anticipated by investors.
Life Insurance Company of India (LIC)
This is of course the biggest.
The latest news is that the company and its investment bankers are smoothing out valuation of the IPO. It is expected to hit the market sometime in the January-March quarter.
This IPO is also crucial for the government. The IPO funds will help to reach the budget deficit target.
Byjus
This IPO is a hype and is widely anticipated.
India’s largest EdTech company is reportedly in the pre-IPO stage. It is expected to file its IPO papers with the market regulator after the end of the fiscal year. The IPO could hit the market in mid-2022.
ola
India’s largest ride-hailing aggregator is also looking at an IPO next year. News reports say it is seeking a valuation of about $12-14 billion.
Ola differs from most tech startups in that it is profitable. Its IPO will certainly be well received in the market.
Delhivery
This could be the first of the major IPOs of 2022. The company has already submitted its IPO papers to the market regulator.
The size of the IPO could be around Rs 50 billion.
These are just the big ones. There are also others, such as MobiKwik, which could hit the market in 2022.
As long as market sentiment remains bullish, we can expect another deluge of IPOs, just like in 2021.
So what’s the best way to capitalize on these IPOs?
Another way to make a profit
Most people, when they talk about making money with IPOs, are only interested in making a profit.
And that is understandable. Many IPOs have yielded nice profits on the listing. Since there is only a few days between requesting an IPO and making a profit, it is a tempting gamble.
But there is a better way. It is possible to make even more money than trading profits with less risk.
How?
Think of IPOs as unlisted companies
The management of a company entering the market for the first time will have to change the way it runs its business.
After an IPO, they are responsible for thousands, even millions of individual shareholders.
They must open the company to very high levels of public scrutiny by investors, regulators and the media.
They must be much more transparent than before in the field of information provision and explanations.
They have to abide by many more rules than before as a privately held company.
All this requires a major change of mindset.
And to be honest, most of the people who run these companies are just not up for the challenge on day one.
They were only interested in raising money from the public, not looking after their interests.
That is why you see the share prices of many new listed companies fall after the IPO. It’s because the market finds out what management is all about.
Now here’s the important point…
This may not be a bad thing. Sometimes management needs some time to get used to the new reality of a listed company.
Investors are not always right to blame management if the stock price falls after listing. It could be a case of misplaced expectations.
Therefore, it is best to view a newly listed company as a non-listed company.
They may be on the list, but they need time to start working as a professionally managed company.
In the meantime, the stock price can go up, down or sideways. That’s fine. If you have invested in the IPO, take the time to understand how management is trying to manage this change.
Do they communicate clearly about the use of the IPO funds? Are they mishandling the money?
How are they executing their plans to improve the company’s revenue and margins? Will the future be better than the past?
If management made short-term promises after the IPO, did they keep their word?
Don’t take management’s words lightly. Check their words with their actions. Have they kept their promises? If not, why? Are they trying to move the goalposts?
Remember to think of it as a privately held company.
This gives you insight into how responsibly the board handles your money.
If they don’t seem to behave ethically and professionally, your choice is simple: sell the stock.
You can suffer a loss. The stock may have crashed. Yes, you can, but it is better to go outside at that time.
On the other hand, the stock may have risen.
That is amazing. But you still have to sell.
Sooner or later, the market will realize that management cannot be trusted.
What if you think management is doing a good job?
In that case, assuming the stock is not too expensive, consider expanding your position.
All the while, don’t forget to maintain a good asset allocation. Don’t put all your money in just one or two stocks. Here is Equitymaster’s suggested asset allocation based on market capitalization.
How Long Should You Hold an IPO Share?
Well, there are few really great stocks that you can hold forever.
So don’t be surprised if you find that you may have to sell your IPO investment sooner than you expected.
Here’s the important point…
In the long run, whatever the initial hype, it is very likely that your IPO investment will eventually end up as a common stock.
In other words, the only things that will matter in the long run are the fundamentals of bread and butter – earnings growth, return on capital, sales, margins, cash flow, dividends, etc.
Here’s why you should consider making a profit if your IPO investment exceeds your return expectations.
To conclude
We recommend that you follow this simple checklist.
Does management deliver what it promises? Yes No?
If not, then sell.
If yes, then check the stock price and implement point #2.
Has the stock exceeded your expectations? Yes No?
If yes, make partial gains and repeat #1 after 6 months to 1 year.
If not, then wait and repeat #1 after 6 months to 1 year.
In this way, you significantly reduce your risk and reap any benefits, based on how management adapts to the new realities of running a publicly traded company.
This is a better way to invest in IPOs than just approaching them from the point of view of stock market gains.
We hope this new way of investing in IPOs will help you build more sustainable wealth with lower risk IPOs.
Have fun investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is from Equitymaster.com)
(This story was not edited by DailyExpertNews staff and was generated automatically from a syndicated feed.)