8 IPO Investment Strategies: Long-Term Growth

Perhaps the first thing that comes to mind of an investor wishing to create wealth is an IPO. The thrill of getting the shares of a budding company and watch the price of the share grow over time is an attraction for both new and seasoned investors. These companies, although showing great promise, need a systematic approach in investment, especially when the investor is looking for long-term growth.

We shall discuss, in this article the best IPO investment strategies, in reference to the Indian market. We would also discuss some of the key factors, sectoral trends, and ways to mitigate risks for better decision-making.

What is an IPO?

An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time with the aim of raising funds to expand, pay off debts, or pursue other growth projects. It is an opportunity for investors to become stakeholders in the company from the bottom level.

Advantages of Investing in IPOs

Investing in IPOs can provide long-term growth if done right. Some of the advantages include:

Early Entry Advantage: IPOs let investors buy shares at a supposedly lower price compared to post-listing.
Wealth Generation: Companies that have solid fundamentals and growth potential will be able to yield greater returns over time.
Portfolio Diversification: Can help diversify your portfolio by buying IPOs of new sectors and industries.

Top IPO Investment Strategies for Long-Term Growth

1. Understand the Company’s Business Model

Before investing in an IPO, try to understand the company’s business model, how it generates revenue, its growth prospectus, and whether the company has a competitive edge.

Questions to ask:

Is the company in a growing industry?
Does the company have a unique selling proposition (USP)?
Is the company’s business sustainable in the long term?

Example: Nykaa’s IPO gained traction due to the company’s unique e-commerce model targeting beauty and personal care, a rapidly growing segment in India.

2. Evaluate Financial Health

The company’s DRHP (Draft Red Herring Prospectus) is an informative document available on the SEBI website. Check the company’s financial statements in the DRHP to get clarity on the below-given points.

Revenue growth: Is the company able to generate consistent growth over the past few years?
Profitability: Are the profit margins positive and the debt levels manageable?
Cash flows: Does the company have a healthy cash flow indicating operational efficiency?

Tip: Avoid companies with high debt-to-equity ratios unless they demonstrate strong earnings potential.

3. Analyze Industry Trends

If the company coming with an IPO belongs to a sector that is poised for growth, then investment in such a company can yield better returns for example.

Renewable Energy: India’s push for clean energy and sustainability is driving growth in this sector. Companies in this sector are investing heavily in wind, solar, and other renewable sources.
Technology: Due to rapid digitization and an increasing internet user base, the technology sector continues to attract more attention. Companies operating in e-commerce, q-commerce, digital payments, and food delivery have become integral part of India’s digital ecosystem.
Healthcare: The Covid-19 pandemic has accelerated growth in the healthcare sector. This has led to the emergence of start-ups and companies focused on pharmaceuticals, diagnostics, and telemedicine. The emphasis on health and wellness will ensure long-term growth in this sector.

By identifying sectors with strong growth trajectories, you as an investor can make an informed decision.

4. Check the Promoters’ Background

The promoters and the management team, play a critical role in the company’s success. Know their track record in the industry, their experience, and credentials. It should raise a red flag if you find any of the following issues.

Red Flags:

History of unethical practices
Lack of industry experience
Overdependence on a single individual

Pro Tip: If the company going public has attracted investments from well-established institutional investors like Mutual funds, pension funds, or insurance companies then it is considered a positive sign.

5. Assess Valuation and Pricing

Valuation lets you know whether the price you are paying for the shares is justified by the company’s financial health and growth potential.

Overpriced IPO Vs Underpriced IPO

a. Overpriced IPO

If the company sets a higher valuation than the actual financial performance or growth prospects then it may lead to lower returns or even a drop in share price post-listing. Generally, this happens when companies rely on hype rather than fundamentals to attract investors.

b. Under-priced IPOs

An IPO is underpriced when a company is cautious about its initial valuation, this will lead to an increase in the share price post-listing and consequently benefit the investors.

Use these valuation metrics to assess whether the IPO is reasonably priced

a. Price to Earnings Ratio (P/E)

This ratio compares the share price to earnings per share (EPS).
A lower P/E compared to industry peers might indicate that the company is undervalued.

b. Price-to-Book (P/B) Ratio

The ratio compares the company’s market price to its book value (assets minus liabilities).
A lower P/B ratio suggests the shares might be undervalued.

c. Enterprise Value (EV)/EBITDA

Compares the company’s enterprise value (market cap + debt – cash) to its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
A lower ratio often points to better value.

6. Diversify Your IPO Portfolio

As the saying goes “Don’t put all your eggs in one basket”. Invest in IPOs across different sectors and market caps to reduce risk.

Large-cap IPOs: Often stable with moderate growth.
Mid-cap and Small-cap IPOs: High risk with high gains. Higher risk but can offer significant returns if the company performs well.

Example: Diversifying your IPO portfolio across different sectors like fintech, FMCG, and healthcare can balance risk and reward.

7. Long-term Holding

It would make for a handsome profit if the share price goes through the roof during the listing day. However successful companies tend to give exponential returns over a long-term period.

Example:
Maruti Suzuki: The company came with its IPO in 2003. Investors who held their IPO shares saw returns of over 3000%.
Infosys: A ₹10,000 investment during its IPO in 1993 would now be worth crores.

8. Stay Informed Post-Investment

Your job doesn’t end with investing. Keep track of the company’s performance, industry developments, and macroeconomic factors.
Annual reports: Provide insights into the company’s progress.
Latest news headlines: Leadership change, acquisition, or regulatory action may influence stock price.

Risks Connected with IPO Investment

While an IPO can be very profitable, it also carries risks:

Volatility: IPO stocks during the initial days are usually more volatile than established ones.
Uncertain future: Not all companies succeed after IPO.
Lock-in periods: Certain IPO investments have lock-in periods, limiting liquidity.

Only invest in IPOs with sound fundamentals and after thorough research and thereby mitigate risks.

Conclusion

Investing in IPOs can be an exciting opportunity to grow your wealth over time—if you take the right approach. By analyzing the company’s fundamentals, keeping an eye on industry trends, and staying informed, you can make investment decisions that truly support your financial goals.

The key to success? Patience and research. Think of IPO investments as planting seeds—you need to nurture them with the right knowledge and allow them time to grow.

For more guidance on IPOs, explore resources like the SEBI website.

Happy IPO investing!