Should you invest in an IPO only for listing gains?

The ongoing rally over the last 16-18 months on Dalal Street has taken many by surprise. The rally not only saw a flurry of investors joining the party but a host of companies also found it opportune to raise capital via the IPO (initial public offering) route. While secondary markets have been struggling, primary markets have been on a roll. With a lengthy list of issues in the pipeline, the IPO market, which has already established a new record with 51 IPOs collecting more than Rs 1 lakh crore for the first time in any calendar year, might be on pace to reach the Rs 1.5 lakh crore milestone.

Given the abundant liquidity, Sebi easing the listing procedure and overall bullish sentiments, the IPO craze is comprehensible. But what many investors fail to understand that IPOs are not just for listing gains. In fact, some companies were even buying on their debuting day made sense. Take the case of companies like IRCTC, Clean Science and Technology, Paras Defence & Space Technologies have created immense wealth for shareholders that didn’t opt for listing gains or who bought the shares on the listing day.

Present situation

Neither all newly listed stocks witness runaway rallies and nor does it make sense to chase them post listing. According to today’s closing price, 31 of the 44 companies that got listed so far in the current calendar year are trading above their listing price.

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Taking a holistic view Ventura Securities is of the opinion that neither one should get excited about overwhelming listings nor be excessively worried about high valuations. It believes investors should ditch the thorns and keep the roses.

“Don’t take a myopic view on companies that are going public despite hearing diverse view about them. Some won’t be convinced with their business models; others would have problems with valuations. But as long as the company management know what they are doing, the potential market size for companies that are going public these days is huge,” said Vinit Bolinjkar, Head of Research, Ventura Securities.