 "New order in the IPO market")
Deven Choksey, managing director of K R Choksey Shares and Securities, is looking forward to listing by general insurance companies. "Insurance is an age-old and proven business. I believe with rising per capital incomes, there will be more need for insurance cover. Listed insurance companies can have a market cap of Rs 2 lakh crore in the next five years. And, if Life Insurance Corporation of India joins the bandwagon, it can be even Rs 5 lakh crore," he says.
It is not only general insurance companies but a whole host of new segments will be entering the market in 2016-17. These include general insurance companies, a stock exchange (the BSE), a mutual fund (if UTI MF gets a nod from the government), e-commerce companies and payments banks.
Read more from our special coverage on "IPO"
Revival of the initial public offering (IPO) market is great for many companies which need the cash to grow. In 2015-2016, fundraising through IPOs touched a five-year high, 24 mopped Rs 14,500 crore. According to Prime Database, another 33 issues are lined up for 2016-17 to raise Rs 16,000 crore. "The pipeline is strong. If the markets remain good and the economy looks up, the amount raised this year could be significantly larger than the previous one," says Prithvi Haldea, founder and chairman, Prime Database.
For retail (mall) investors, all this is good news unless they are seeking only listing gains - a bad strategy. In 2015-16, 50 per cent or 12 companies have given positive returns since listing, whereas the rest have fallen. While the IPO market's performance will depend on buoyancy in the secondary market, most financial planners say retail investors can put some money in these offers because good companies can often be bought at cheaper rates. How should retail investors gauge the situation?
Take cues from anchor investors
Underwriters nowadays make sure a portion of the offering is sold to anchor investors. This helps them in two ways. One, a certain portion gets subscribed beforehand and there is less dependence on the public. Two, when a company is able to attract high-profile anchor investors, it creates a positive perception in the minds of retail investors. Investors should closely look at the type of anchor investors participating in an IPO. "The presence of anchor investors and their quality, is a very good indicator," says Haldea.
IPOs are open for three-four days. You may invest on any of the days without it affecting the probability of allotment. Always wait till the last day and gather as much information as possible about the IPO, including who the anchor investors are.
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MD & CEO, ICICI Lombard
Analysts focus on the combined ratio, which is an indicator of profitability from core underwriting operations. This should be 100% or less. Though in India, we have an additional cushion of 8-9% returns from the investment portfolio, from a long-term perspective, general insurers need to move towards a combined ratio of 100% or lower. In addition, factors such as strength of franchise, the management team and quality of reserving need to be looked at
MD & CEO, Fino PayTech
Factors like team and its experience in executing projects successfully in the past and relationship with customers and vendors will be key. From the financial point of view, business model, cost, revenue and break-even points will be crucial. Each payments bank will have their own model and it is only three-five years when definitive numbers and valuations can be ascribed to these companies
Be wary of high valuations
In most cases, where the IPO quality is high - a quality business, with high-quality management - valuations are not inexpensive. The timing also determines valuations. "When promoters bring their IPOs in good times, they benchmark their valuations to those of already listed companies in the same sector. In such times, most companies are already trading at high valuations, so promoters also offer their IPOs at high valuations," says Jatin Khemani, Managing Director, Stalwart Investment Advisors, a Delhi-based wealth management firm. Of course, the higher the valuations, the lower your probability of making money from the issue. If you have checked the quality of the business and quality of the management, and found both good, you can pay a reasonable to high valuation for an IPO. However, remember that doing the valuation exercise for IPOs is hampered by limited information. With an already-listed player, you have many years of operational performance and stock performance history, both of good and bad times. At best, retail investors compare the IPO valuation with that of other listed companies in the same sector. Such comparisons are quite inadequate. Though two companies could be in the same sector, they could be very different in terms of promoter quality, operational efficiency, vision, execution capability, and so on.
Take advantage of Asba
Asba (applications supported by blocked amount) has turned out to be a boon for retail investors. Earlier, when you applied for an IPO, the money would get deducted from your account. Even if allotted only a small number of shares or none at all, your money remained blocked for a long time. Asba has made the application process a lot simpler because the money stays in your account, though it does get locked. Whatever allotment you get, that amount is deducted and the rest is unblocked. So, an investor can apply for as much as he wants (the current limit for retail investors is Rs 2 lakh) without worrying about his money getting blocked for a long time. The problem is that the Asba facility is not available at all branches.
As it gradually spreads to all bank branches, more retail investors will be able to avail of the benefits.
What about new businesses?
Several new businesses, never been listed before, could enter the primary market in the near future. In fact, Infibeam (e-commerce) and Equitas (small payments bank) have recently launched their IPOs and as mentioned earlier, more sectors are expected to come. While evaluating any business, have a look at its number and details. Investors can also draw comfort, especially in the case of new-age businesses, from the presence of private equity (PE) and venture capitalist (VC) investors. Their presence usually indicates a lot of due-diligence has already been done on the company, it is being mentored, and is likely to have a high quality of corporate governance. "Make sure the PE/VC investors are either not exiting or exiting only partly from the IPO, which means they see great value in the company in the future," says Haldea.
Finally, remember the primary market is a seller's market. The promoters and PE/VC know much more about the company than you do. Therefore, it pays to approach this market with a high degree of caution.
TIPS FOR ANALYSING NEW SECTORS
Ecommerce
Promoter background
- Education
- Age — less the better
- Past businesses — serial entrepreneur is not a good sign
- Better quality investors, higher chance of success
- Reasons for exit- whether mandated or operational issues
- Higher cash burn with high growth is a negative sign
- Negative perception in media is bad
Size of AUM
- Higher the better
- Vintage of fund management team is important
- Consistency of returns on risk adjusted basis
- Large and easy online presence is going to be extremely important in times to come
- Presence in large distribution houses
Promoter background
- Education
- Age — less the better
- Past businesses — serial entrepreneur is not a good sign
- Whether established corporate- chances of success are higher with established companies
- Better quality investors, higher chance of success
- Reasons for exit- whether mandated or operational issues
- Capital requirements
- Physical presence requirement- lot of physical presence requires cost, which will delay break even
- Negative perception in media is bad
Promoter background
- Govt or private sector
- Private sector has done better
- Motor vs non-motor — non-motor is good
- Level of underwriting profits tells one about intrinsic profitability of business
- Too many claims not good for business
