Too many IPOs, limited cash: How investors should allocate money across multiple issues

India’s primary market is witnessing a rush of IPOs, giving investors more options but also making it harder to decide where to deploy their money. With multiple issues competing for investor attention and capital at the same time, the challenge is no longer finding an IPO to apply for, but identifying the issue that offers the most attractive risk-reward opportunity.

The scale of the opportunity and the dilemma was evident on Wednesday, September 9, when as many as 10 mainboard IPOs were at different stages of subscription. Six IPOs opened for subscription that day, three entered their second day of bidding, while another issue reached its final day.

For retail investors with limited funds, applying to every issue may not be practical. The crowded IPO pipeline makes capital allocation an important part of the investment decision. Investors have to decide not only which IPOs look attractive, but also how much money they are willing to allocate to each issue.

Investors face a capital-allocation dilemma

When several IPOs are open simultaneously, investors have to choose between competing opportunities. A strong subscription response, high grey-market premium or market buzz can create a sense of urgency, but these factors alone may not justify an investment.
Narendra Solanki, Head Fundamental Research – Investment Services, Anand Rathi Share and Stock Brokers, said investors should assess IPOs on business quality, financial performance, valuation, issue structure, management quality and post-listing growth potential.

“In such a market environment, investors should evaluate IPOs based on key parameters, including business quality, financial performance (revenue/EBITDA/PAT growth, margins, ROCE/ROE and cash flows), valuation (P/E, EV/EBITDA, P/B and other relevant multiples relative to listed peers), IPO structure (fresh issue vs. OFS, with preference for issues where proceeds are meaningfully deployed towards growth, capex or deleveraging), management quality (promoter track record, corporate governance and related-party transactions), and post-listing growth and value-creation potential,” Solanki explained.
ALSO READ:Are NSE unlisted shareholders staring at losses? Here’s what IPO pricing indicates“With multiple IPOs competing for investor capital, maintaining valuation discipline and focusing on fundamentals is more important than being driven by IPO excitement or short-term listing gains,” he added.

The current IPO rush spans businesses across sectors such as engineering, infrastructure, payments, rental services and industrials. While this gives investors greater choice, it also makes comparing companies on their fundamentals more important.

G Chokkalingam, Founder of Equinomics Research, said investors should consider both fundamentals and tactical opportunities when evaluating IPOs. On valuations, he said investors should compare an IPO with listed peers and avoid paying a substantial premium to comparable companies.

“So, in terms of the valuation comfort zone, as compared to an already listed player, whatever the valuation is at the high-flow time, one cannot give more than a 10–15–20% premium to what is already given to the existing peers. In case there is no comparable peer in the market, then we can look at the PE ratio and the PEG ratio,” Chokkalingam said.

He added that “Of course, PE ratios are always elevated these days for many Indian companies. So, one can look at the PE ratio, whether it is around 20. If it is more than 20, one can look at the PEG ratio, which is the PE ratio divided by the three-year profit growth.”

The use of IPO proceeds is another factor investors can consider, particularly whether the funds are being directed towards strengthening the business.

“Another very important thing one can look at is whether the entire profits are going into the promoter’s pocket, or whether at least some resources are going towards retiring the debt or capital expenditure. The preference can be given to the second category, where at least some money is going towards retiring the debt and towards capital expenditure,” Chokkalingam said.

Once the fundamental parameters are broadly comparable, investors can then assess tactical factors such as sector sentiment, retail participation and subscription demand.

“When these things are more or less common, then you can see the tactical opportunity—whether the theme is now attractive. One way to look at it is whether the theme is right now attractive to the market. The second thing to look at is whether the retail float is very low and whether the subscription responses are very high, because they get listed probably at a higher price,” Chokkalingam said.

How important is GMP when evaluating an IPO?

Grey market premium (GMP) can provide an indication of market sentiment and potential listing performance, but analysts caution against using it as the primary basis for an investment decision.

Solanki said investors should first assess the underlying business and its valuation.

“GMP can be a useful indicator of market sentiment and potential listing performance, but it should not be the primary factor when evaluating an IPO. Investors should first focus on the company’s business quality, financial performance, growth prospects, valuation, management quality, use of IPO proceeds and key risks. A strong GMP may indicate healthy investor interest, but it can also be driven by short-term speculation and may change significantly before listing. Conversely, a low or negative GMP does not necessarily mean the underlying business is unattractive,” Solanki said.

Chokkalingam similarly warned against relying on GMP without considering valuation.

“Blindly looking at GMP is dangerous. There are many incidents where a huge grey market premium was followed by debuts at 30–40% losses as well. I am not saying one should not look at it, but it could be a combination of factors without totally ignoring the valuation comfort zone,” said Chokkalingam.

Disclaimer: This article has been written by Kumar Gaurav, who is not a SEBI-registered Research Analyst or an Investment Adviser. Gaurav and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment.