News reports and financial dailies are rife with talks of the IPO or Initial Public Offering boom in India. 2021 is touted to become the year with one of the highest number of listings in the country and, with the market flooded with liquidity, there is no dearth of investors. While IPOs were previously the mainstay of institutional investors and high net worth individuals, that is no longer the case. With the millennial population growing and expanding its earning capacity, there is a tremendous appetite for risk and reward and IPOs are one of the routes gaining major momentum. In fact, according to an Ernst & Young report,[1] the total proceeds from Indian IPOs, from January to September 2021, stand at 9.7 billion dollars. This massive amount has been raised through 72 IPOs.
While the landscape seems promising, with a slew of the new offerings performing remarkably well, there are also some duds which bring forth the question of how to separate the wheat from the chaff. Let us look at some of the stellar instances. In July, Zomato made a grand opening after listing at 115 rupees per share on the BSE, a 51.3% premium over the IPO price. While trading, it even went as high as 81% over the issue price, ensuring a neat profit for early birds. Beauty brand Nykaa was another grand debut, with the company’s shares listing at a 79% premium on its IPO value in November. However, fintech major Paytm saw its share value plunge by 28% on debut, making intrepid investors lose big.
How to choose the best?
Many of the companies which have listed via IPOs this year are from the new age sectors, including food delivery apps, beauty brands, and fintech players. With no fixed metric to evaluate against, how do you decide on where to place your hard-earned money? Here are some of the metrics you should keep in mind:
- Is there a network involved? This refers to the business model wherein the company is dependent on a network of buyers, sellers, and consumers. If it is a network business, ensure that the new company has a solid network as this will drive future growth and returns.
- Value in terms of Customer Lifetime Value (CLV) – Does the company have a high customer lifetime value or the total revenue which it expects to generate from a single customer? If yes, you can consider adding it to your portfolio.
- Cost of getting new customers on-board – No business can do well if it does not add new customers to its fold. Consider the customer acquisition costs of the company coming up with an IPO. Generally, higher customer acquisition costs vis-a-vis CLV could spell trouble.
- Churn rate – Many subscription-based companies indicate high subscriber figures at a certain point in time. However, it is important to understand the churn rate of subscribers in order to evaluate the durability of their business model. Churn rate indicates the number of users who leave the platform and this depicts its real standing in the business.
Additionally, you also need to study the founders, their innovation history, and the speed and agility with which they have brought their product to market. While these are the major attributes to evaluate before choosing to bet on an IPO, you need to put in strong research before deciding on which bets will pay off once the shares are listed. Or, in worst case scenarios, you may end up as the butt of the memes poking fun at damp squibs.
