Assessing Business Environment IPO - choosing the right time

Submitted by Group 2

IPO - Introduction
IPO is a source of collecting money from the public for the first
time in the market to fund for its projects. In return, the company gives the share to the investors in the company.

Made of two types : Fixed price issues Book Building Majorly done to raise capital Process is directed towards both individual and institutional
investors.

IPO allows venture capital to exit investment.

WAYS TO RAISE CAPITAL

Initial Public Offer (IPO) - The process by which a private company
can go public by sale of its stocks to general public.

Follow on Public Offer(FPO) is a process by which a company,

which is already listed on an exchange, issues new shares to the investors or the existing shareholders.

Debt Financing - When a firm raises money by selling bonds, bills, or

notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

TIMING OF IPO
A time period with a lot of IPOs is called hot issue
period.

If a hot issue period is driven by supply-side then it may be

advantageous for a new firm to go public.

If a hot issue period is driven by demand for funds then a

new firm may be better off delaying to go public competition for funds.

MAJOR FACTORS AFFECTING IPO

1
2 3 4

Financial Health of the company Choosing the right investment banker

Choosing the correct price

Communicating the required details to the investors properly

EXTERNAL ENVIRONMENT FACTORS

A. B. C.
Macroeconomic condition of the country
Stock Market Volatility Foreign fund flow into the equity market

MACROECONOMIC CONDITION OF COUNTRY

Stock market is a mirror of the economy of the country. The investor sentiment is very high when the economy
performs well.

Analysis of two periods : Period 2007-2010 - GDP growth was phenomenal Period 2011-current Struggling GDP

Performance of BSE IPO Index

This is the performance of the BSE IPO Index from the period AUGUST
2009 to DEC 2010, when the economy was at its boom.
2500

BSE IPO INDEX from AUG 2009 to DEC 2010

2000

1500

1000

500

Performance of BSE IPO Index

Once the economy started its downfall, the sentiment in the primary
market took a big hit.
2500

BSE IPO INDEX from JAN 2011 till date

2000

1500

1000

500

MACROECONOMIC CONDITION

GDP 2007-2010

MACROECONOMIC CONDITION

GDP 2011-2014

MACROECONOMIC CONDITION
Observation :- Number of new public issues had a direct correlation with the GDP growth.

GDP 2007-2010
GDP growth almost touched
double digit growth

GDP 2011-2014
India registered its decade low
quarterly GDP for successive quarters. and even those which were launched, got very poor response from the investors.

almost all of the IPOs

launched during the period got a huge response from the market.

Only few IPOs were launched

Even the junk IPOs were

grabbed.

Even IPOs of some very good

companies were hammered.

MACROECONOMIC CONDITION

IPO returns till date from their issue price

MACROECONOMIC CONDITION

IPO returns till date from their issue price

Observation :- Most of the IPOs issued during the boom
phase of 2007-2010 are trading well below their issue price.

Majority of the IPOs which were launched during this time

period have lost more than 40% of the issue price during these years.

It was the sentiment that drove the prices during the early
period.

MACROECONOMIC CONDITION

Oversubscription
70 60 50 40 30 22 20 10 0 2007 2008 2009 2010 2011 2012 2013 19 15 6 6 9 62 Times of issue size oversubscribed

Observation :-The amount of oversubscription was very high during the boom period (20072010). The amount of oversubscription dropped considerably in 2011 and 2012.

STOCK MARKET VOLATILITY

Volatility is more prominent during bear phase than in the bull
market.

During volatile market conditions, investors refrain from

making fresh investment commitments.

This discourages companies from raising funds by launching

IPO during volatile market condition.

The measure of volatility taken is Indian VIX (Volatility Index)

STOCK MARKET VOLATILITY

STOCK MARKET VOLATILITY

Observations:-

The trend shows the impact of volatility on the number of

issues declared by companies.

2013 was one of the most volatile among the seven years
taken for the study. It was observed that 2013 was the year with the least number of IPO launches.

This is also true for the less volatile years where companies
rushed to the primary market to take advantage of the favourable market conditions.

FOREIGN FUND FLOW INTO EQUITY MARKET

Majority of the stockholders of India are FIIs and it
wont be wrong to say that FIIs drive the Indian stock market.
the sentiment on the street improves the exchange rate of the country broaden the probable investor base of companies launching
IPOs.

Higher Foreign fund enhances:-

FOREIGN FUND FLOW INTO EQUITY MARKET

FOREIGN FUND FLOW INTO EQUITY MARKET

Observations The trend of Foreign fund flow was intact in the first few years. Post 2011, higher Foreign flows into the equity market could not trigger companies to come out with more IPOs. Probable reasons include: depreciating Rupee increased the amount of Fund flow in INR
terms.

dollar investment into the countrys equity market was increased

only by a small amount.

falling sentiment and high volatility in the stock market.

CONCLUSION
A successful launch does not necessarily imply a profitable
investment opportunity for the investors.

Many companies ride the listing day Euphoria because of the

set of well known investors the company has but fail to give return to the investors in the long run.
company will be always successful.

It is wrongly presumed that IPO of a financially strong

External business sentiment and environment is as

important as the financial health of the company for a successful IPO launch.