Amidst the IPO rush, deploy a prudent strategy

The ongoing bull run poses an excellent opportunity for investors to create wealth, especially at a time when there is an initial public offer (IPO) rush on Dalal Street. In the first seven months of the current calendar year, 30 companies have raised Rs 53,590 crore through  IPOs. Of these, seven turned out to be multi-baggers, galloping over 100% on their issue price. The kind of returns that IPOs are giving is creating an IPO frenzy.

Today, four companies open their public offering to raise over Rs 3,600 crore. Looking at the performance of past IPOs, many investors will be tempted to apply for all the IPOs despite having no or limited knowledge about the company. That’s not a wise strategy to have as investing in wrong companies can lead to wealth destruction. Take the case of recently listed companies like Brookfield India Real Estate Trust REIT, Indian Railway Finance Corporation, Kalyan Jewellers India and Suryoday Small Finance Bank that are quoting far below their issue at a time when Nifty has crossed the 16,000 mark.

Investors need to deploy a prudent strategy for selecting which IPO to subscribe to and which to give a miss. The first step in devising such a strategy is to be aware of the kind of business the company is involved in. You should ideally prefer companies that are into a business that has high growth potential. This will help the company to make consistent profits and increase its revenue. One can avoid investing in IPOs of companies whose business activities are unclear.

The second step is to check the financial health of the company to see if it is profitable or not and how are the revenues growing.  Examining key financial ratios like debt to equity, earnings per share (EPS), cash flow, return on capital employed, and other key financial ratios before deciding to invest in it. Avoid investing in an IPO if the company is making losses or its financials are not up to the mark.

Being aware of the various risk factor associated with the company and comparing it with peer groups will further give an investor conviction of whether to apply for an IPO or not. Don’t get swayed with hefty returns delivered by IPOs in the past or grey market premium. Rather, go through the red herring prospectus available on Sebi’s website and make an informed investment.