Some IPOs are doing better and there is a method to the madness
Initial Public Offerings (IPOs) collected Rs.7500 crore in the month of Sep-20. As of September end, IPOs garnered more than Rs.22,000 crore during the year. If things go well, this could end up being the best IPO year after 2017; not counting the LIC and BPCL IPOs if they happen this year. But the real story is in the IPO performance. Even though the investor response & listing performance looks random, there is a method to this madness. Here is what is happening.
All about futuristic ideas
If you look at some of the IPOs that got a fantastic response in the market, the common thread appears to be that they operate in futuristic segments. Happiest Minds, Route Mobile and Chemcon all got oversubscribed by more than 100X. The reason was their business model. Ashok Soota’s Happiest Minds was focused on IOT and digital while Route Mobile focused on the cloud and SAAS as a business model. Chemcon, like the Rossari IPO earlier this year, is focused on specialty chemicals and largely caters to the pharmaceutical sector. With the big shift towards APIs and CRAMS and a lot of PE funds showing interest in this area, these IPOs saw strong demand from retail, HNIs and even institutional investors. In the above 3 cases, the heavy oversubscription was supported by post listing gains of over 100%. IPO market is really not interested in the traditional stories any longer. It has to sync with what the world is moving to.
Sectors and valuations
If futuristic ideas are what IPO markets are looking for, there is one more trend that is visible in the IPO subscriptions and the post listing performance of IPOs in September. Clearly, IPO investors are shunning financial players. Angel IPO QIB portion did not even get 100% while other IPOs like UTI AMC did not get a very favorable response. In the recent week, if you compare the listings, the performance of Chemcon has been far superior to CAMS. UTI AMC just got 2.3X subscription while Mazagon Docks IPO got oversubscribed 157 times. One can argue that Mazagon was reasonably priced at 6X P/E ratio despite an order book of Rs.50,000 crore. The fact is that investors are comfortable with the defence outsourcing story than with the inherent doubts over volatile financials.
Welcome to the IPO rush
If you think this is going to be another IPO rush, just think again. In 2017, retail investors badly burnt their fingers investing heavily in PSU insurance IPOs. Most of these stocks are quoting at a fraction of their IPO price with limited visibility of any growth or returns. This time around, the IPO investors are likely to focus only on those companies that have a futuristic story to narrate and reasonable valuations to boot. As some of the IPOs have proved; if the IPO has most of these features, response to the IPO can be surely overwhelming!
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