IPOs, IPOs, Everywhere: Which One to Invest In?

Fri, 16 Sep Pre-Open

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<>Indian markets seem jovial these days. And there are many factors that have led to this behavior of Mr Market. Some to be named are the results season, revival in rural demand on the back of above normal rainfall, the passage of 7^th Pay Commission recommendations, and the GST reforms. But that's not all that is driving the markets. Initial public offerings or IPOs have kept the Indian markets busy of late. Listing gains and over subscription of the issues have caught the eye of market participants. With this euphoria, there are many more IPOs lined up in the coming days.

One of the biggest IPO - since Coal India's stake sale in October 2010 - is set to take place during the next week. The IPO is also recorded as the first IPO in India's insurance sector. This comes as ICICI Bank plans to raise Rs 60 billion by selling a stake in its subsidiary ICICI Prudential Life Insurance Company. By doing so, the bank has valued the insurer at Rs 480 billion. In fact, this is what Tanushree Banerjee, Equitymaster co-head of research, recently wrote in one of the issues of the Research Digest (subscription required):

• The IPO of ICICI Life Insurance not only has the lure if being a billion-dollar issue. But it will also be the first pure-play insurance company to be listed in India.
  
  Now, if you've seen the financial statements of banks and non-banking financial institutions, beware that insurance is a different animal altogether. What constitutes impressive financials and a strong balance sheet for insurance companies differs quite a bit from other financial entities.
  
  Valuing insurance businesses is going to be a novel experience indeed.

Apart from the above, there are many companies that are considering going public. So expect much more action in the IPO markets going ahead. This begs the question: What should be one's approach towards IPOs?

As far as our views are concerned, one should not get swayed away by the buoyancy surrounding IPOs. Instead, what one should look for in IPOs is the fundamentals of the business and the attractiveness of valuations.

We at Equitymaster have always recommended IPOs cautiously. And Rahul Shah, co-head of research at Equitymaster, best explains our rationale behind this approach. As he wrote in one of the editions of The 5 Minute WrapUp... 'We know what a dirty game the IPO business is. We've seen it over and over again: It's a game where the odds are stacked against investors. So for us, the equation is simple. We'd rather face criticism in the short run than see our subscribers lose money over the longer term. We weren't afraid to do this during the hot IPO days of 2007, and we're not afraid to do it today.'

The bottomline: One needs to evaluate each IPO on its merits by considering its fundamentals and most importantly the valuations, particularly when the hype and mania surrounding an IPO is at its peak.

Our recent edition of The 5 Minute WrapUp offers two ways to think about IPOs and explains how to profit from them.

Further, to help you approach the big IPOs as an enterprising investor would, we are preparing special handbook for IPO Investing. Watch this space to know how you could access it...

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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