1. How to choose the right public offering

How to choose the right public offering

Retail investors must look at the company’s fundamentals and cash flows

By: | Published: August 26, 2016 6:03 AM
The strong subscription to the RBL Bank offer is an indication of the growing appetite for investors in stocks and the bull run in the primary market (Reuters) The strong subscription to the RBL Bank offer is an indication of the growing appetite for investors in stocks and the bull run in the primary market (Reuters)

Individual investors are looking at initial public offerings (IPOs) as the retail portion of recent primary offerings have been oversubscribed. This week, the retail investor portion of the R1,200-crore RBL Bank IPO, which closed on Tuesday, was oversubscribed 5.58 times. RBL Bank is the first private sector lender which came out with an IPO since Yes Bank in 2005. Among state-owned lenders, Punjab and Sind Bank was the last to go public in 2010.

The strong subscription to the RBL Bank offer is an indication of the growing appetite for investors in stocks and the bull run in the primary market. This year till now, 16 companies have raised nearly R11,000, compared with R13.500 crore in the whole of last year. Several more companies will hit the market soon to mop up funds.

Some of the recent public offerings saw retail portion getting oversubscribed. For instance, in the IPO of Bengaluru-based staffing solution provider Quess Corp, the retail portion was oversubscribed 32.8 times. Similarly, the retail portion of Advanced Enzymes got oversubscribed 11.12 times, while TeamLease Services and Thyrocare Technologies saw the retail portion getting oversubscribed 10.34 times and 8.3 times, respectively.

Some of the steps taken by the markets regulator have restored the confidence of investors in the primary market. In 2015, Sebi made Applications Supported by Blocked Amount (ASBA) mandatory for retail investors. In this, the application money is debited from the investor’s account only after the shares are allotted. Moreover, the regulator has reduced the timeframe for the listing of IPOs, leading to better retail participation.

Companies tap the IPO market to raise funds for expansion and diversification. It also helps the company to reach its optimal capital structure and equity shares help in price discovery. An IPO is underwritten by an investment bank, broker dealer or a group of broker-dealers. They buy the shares from the company and then sell the shares to investors across various categories like retail, qualified institutional buyers etc.

Retail investors must look at the company’s fundamentals before investing in IPOs. Investors must read the red herring prospectus (RHP) of the company carefully, which will give details of the revenue and earnings of the company for the past few years. One must see if the company is profitable, has cash flow and the risks are properly underlined. Investors must look at the IPO grading, which is to be mandatory done by the company from at least one credit-rating agency. A grading of 4 out of 5 is considered good.

Investors must keep in mind that the price one pays for a share in an IPO is always for the company’s future performance. One must look at the past performance of the company to estimate how well the company is going to perform, going forward. If the company’s performance is good, one can expect a higher gain as the stock market rewards those firms where there is capital appreciation.

Analysts say valuations should be looked at in terms of cash flows, earnings, corporate governance, debt-to-equity ratio and returns. Ideally, to generate higher returns from equity, investors must look at both fundamental and technical valuations. It is also necessary to check the shareholding pattern in the company by different parties such as promoters, government and public sector undertakings. Generally, a higher holding by these parties indicate a good signal.

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