Hold or Exit an IPO Post Listing
Many investors hit a jackpot making substantial returns from the listing gains in the IPO. The recent IPOs like Indigo Paints (109.31%), MTAR technologies (88.22%) have given outstanding returns to its investors in the form of listing gains and continue to be the top performers (check IPO Performance Tracker here ) But many times certain IPOs benefit from the euphoria present in the market and it suddenly fades off with a correction in the markets.
Also many of the IPOs may not be fundamentally strong to sustain in the long run. For example, recent Heranba IPO got oversubscribed by 85x, it made a listing gain of 30% but it soon faded its listing gain and currently quoting near at par to its issue price! Hence after being one of the lucky allottees, investors must adopt a strategy post the listing of the stock. Here are some key factors that can be considered to track or decide whether to Hold or Exit an IPO Post Listing.
Utilisation of the proceeds of Issue
RHP states the objects of the offer i.e. the purpose of the Issue. The purpose ranges from repayment of existing debt, expansion plans and general corporate purposes. It should be checked that the Issuer is utilising the proceeds as laid out in the prospectus. SEBI vide a circular in Dec 2019 has mandated all the listed entities to submit a statement of deviation with comments of the audit committee till the proceeds have been fully utilised. This disclosure is to made on a quarterly basis along with declaration of financial results (within 45 days of end of each quarter / 60 days from the end of the last quarter of the financial year).
An investor has to be attentive if much of the amount has been diverted for working capital requirements while deviating from its expansion plans. Such a company is bound to underperform in the long run. Hold or Exit an IPO Post Listing
The financial performance of the Issuer needs to be tracked to see that its revenues and profitability are growing and sustainable as projected in the RHP. It is a crucial check as the Issuer may dress the financials before IPO to make them appear stronger than its peers. There are quite a few IPOs where the financials deteriorate just after the launch of the IPO. Hence it is advisable to look at the quarterly results of the Issuer.
Influence by Anchor investors/Shareholding Pattern
Sometimes the Retail investors get influenced by the anchor investors who are subscribing to the IPO. It is worth noting here that usually, the lock-in period for these anchor investors is only 30 days. Hence it may be possible that the anchor investors may exit within that period. If they do exit then it’s an indication of investment with a speculative motive which is short term.
SEBI has made it mandatory to disclose the shareholding pattern of the IPO companies one day before the issue as well as at the end of every quarter after listing. One should keep checking the shareholding at regular intervals to know of any deviation.
Key strategic developments
In addition to the above factors, an investor should keep a check on whether the Issuer is considering any sale of its company or major takeovers not specified in RHP during the time of public Issue. Sometimes the IPO companies indulge in this without taking into account the interest of minority shareholders.
In a nutshell, reviewing the financial performance of the IPO Issuer quarterly, tracking the use of IPO proceeds are some of the measures that investors can use to monitor their IPO investments and make their strategy to hold or sell as per their asset allocation and risk-bearing capacity.