War in Ukraine and the IPO market: what investors need to look at

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Will companies defer plans for IPOs?

If the Ukraine conflict drags on and crude prices remain elevated, there’s a possibility that the stock markets will remain subdued. As the IPO market is linked to the performance of the stock market, issuers are likely to wait for a better time — until the Ukraine conflict ends and stock markets stabilise, investment bankers said. The LIC public issue, through which the government planned to raise around Rs 60,000 crore, is expected to get deferred now. Experts say that even if a company comes out with a public issue, it may not see the enthusiasm seen over the last one year, and the returns too may be limited.

How have recent issues performed?

Over the last 11months, 50 companies managed to raise over Rs 1.1 lakh crore from the equity markets — the highest mobilisation in a year. Retail investors queued up in large numbers and many returned empty-handed as the issues got mobbed; some of them even got subscription of over 100 times.

The performance of the issues shows why the investor needs to be careful. While 22 of the 50 issues launched this financial year are trading below their issue price, nine generated returns of less than 11% – the Sensex gain since April 1, 2021. Some new-age companies have fallen in the market volatility recently.

Should you invest in new companies?

Market experts say investors need to be very careful about these. Currently, One 97 Communications (PayTM) is trading at a discount of 63% to its issue price, and Car Trade Tech at a discount of 65.8%. FSN E-Commerce Ventures (Nykaa), which hit a high of Rs 2,574 over its issue price of Rs 1,125, closed at Rs 1,502 on Thursday — a premium of 33.6% over the issue price. Zomato, which saw its share price more than double after listing, is trading at a premium of 8.1% over its issue price.

Experts feel that while these new-age technology companies demanded high premium and benefited from market liquidity and investor enthusiasm, sentiments are tapering. “Globally, there is lot of irrationality around start-ups. It is important to understand that when the market corrects, the investor confidence gets shaken even if a company declares a decline in profits in one quarter. So, in most of these companies where profitability is not visible for the next five years, it is very tough for an investor to stay invested, and that is what has been happening over the last couple of months,” said the head of research with a leading financial services firm.

Should you go for current IPOs?

After the buoyancy over the last 11 months, equity markets are expected to remain volatile in the near future on various accounts: global inflation concerns, withdrawal of global liquidity, rise in bond yields and interest rates — and now geopolitical tensions and rising crude oil prices. Upcoming issues may not be able to match the interest received by those launched over the last 11 months.

While that may limit listing gains, investors can go for companies that have a sound business model and growth potential. Relatively weak equity markets would also mean that the issues may be more reasonably priced, which is good for investors.

Is high subscription a good indicator?

In many cases, it holds true. If the qualified institutional segment gets strong subscription, it indicates institutional investors, who have the resources to do due diligence, are comfortable with the company’s prospects.

However, in several issues in the last 11 months, this has not been the case. Krsnaa Diagnostics Limited, whose issue had an oversubscription of more than 64 times, is currently trading at 41.5% below its issue price. Windlas Biotech, oversubscribed over 22 times, is trading 47% below its issue price.

What should investors look at?

An IPO is a derivative of the secondary market. If the secondary markets are strong, investor sentiments are high, and IPOs tend to fare well. However, that is not true for all cases. Investors need to thoroughly study the company — quality of promoters, business fundamentals, and financial and peer review analyses. Corporate governance practices should be given top priority. Investors must study other listed companies in the sector and compare their growth, and their PE ratio (market price to earnings per share). If the company coming with its IPO is demanding a higher valuation, they can choose to skip the issue.

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