why I don’t like IPO investment ?

COAL India, a navratna company is set to launch its Initial Public Offering (IPO) tomorrow. The Government has fixed the Coal India Ltd initial public offer (IPO) price between Rs 225 and Rs 245 a share. At this price band, government expects to mop up between Rs 14,211 crore and Rs 15,475 crore from the issue that will open for subscription on October 18.

In last few months, I have seen IPO advertisements for so many companies(Coal India, Eros International, Career Point, Prestige Builders, Cantabil Retail, Jaypee Infratech etc just to name a few), that it looks like an IPO surge has hit the Indian Stock Markets.

The basic reason why such an IPO deluge is coming in the Sep-Oct month this year, is the bullish secondary market. The stock market is typically driven by sentiments which are currently extremely positive due to the large influx of FII money being pumped into Indian Stock Market.  And this is the reason I hate IPO investments.

The IPO route is great for the promoters who can mop a good amount of cash riding on the bullish stock market and most investors look at it as a mechanism to make quick bucks.

The problem is the IPO hype created by companies and underwriters (who are essentially salesman for the IPO) by creating a huge amount of excitement and pro-claiming it as a once in a life-time opportunity. The side-effect of this over-hype is that retail investors jump-in the IPO bandwagon regardless of fundamentals of the company. And this is the reason I consider it as an extremely risky way to invest my hard-earned money. 

The price of an IPO is something you can not control while buying and the promoters/underwriters would like to have the IPO price as high as possible. One of the glaring example is the Reliance Power IPO, where most retail investors have lost money.

So I have decided not to put my money into any IPO, but that is just my opinion. If someone does due diligence before investing in IPO, then it may be a good bargain.

So what should be looked at in the IPO before investing? Here are some basic points:

1) Promoter Background: Check the promoter credibility, previous ventures and if any legal cases pending on the promoter.

 2) Historical Performance:  The same due diligence is required to buy IPO as you would look for stocks in secondary markets. Check at least the last five year performance. 

3) Valuation: Check out the industry peers valuation along with the company’s valuation. 

4) Purpose of IPO: Check the reasons for the promoters to look for more money through IPO route. 

5) Risk Factors: Check various analyst reports, IPO prospectus and other ways to identify the risks involved.

If you have done your research and are confident about the IPO, go ahead and best luck for making good money!!