A gateway to invest in potential Indian IPOs

Have you heard from anyone saying that he has been allotted all the shares he subscribed for in a good company IPO and also made maximum gains from that investment? Most likely not.

Many of us who participate for an IPO experience challenges like

1. Access to IPO -
   Good company IPOs are normally oversubscribed which means retail investors either not getting allotment at all or getting minimal allotment.
   
   

   Only for illustration purpose. Includes all IPOs done from Jan 2018 to April 2021

   
   


2. Selection of best companies –
   Performance of recent IPOs shows that not all IPOs are investment worthy. For retail investor, it becomes very challenging to get access to company’s data and research in order to select best company IPO.


3. Lastly, Post listing gains- most of us exit on the listing day thereby missing out on post listing gains.
   
   

   Only for illustration purpose. Includes all IPOs done from Jan 2018 to April 2021

   
   

Internal Analysis. Only for illustration purpose. 1) Includes all IPOs done from March 2017 to April 2020. Quartiles by Listing Day Gain

The best way to overcome the above challenges of IPO investing and benefit from heightened IPO activityis by investing through a mutual fund. Mutual fund can participate as an anchor investor and hence have better access to good company IPOs. Such funds do all the relevant research and try to identify strong IPOs which not only benefits from listing gain but importantly can generate wealth over the long-term. With that perspective, the Edelweiss Recently Listed IPO fund can be an ideal choice.

The fund was launched in February 2018 as Edelweiss Maiden Opportunities Series- 1 as a closed ended fund. Foreseeing the investment opportunities in the immediate future, it has now been converted into an open-ended fund for new investor to benefit from the heightened IPO activity. Like its previous avatar, Edelweiss Recently Listed IPO Fund will invest in recently listed and upcoming Initial Public Offerings.

Primary Market in India

• The primary market in India is quite active. In the last 5 years (ending 31^st December 2020), we had on average 22 – 23 Initial Public Offerings every year


• Even in 2020, the year where COVID-19 engulfed the world, we saw 13 IPO with the trend picking up in 2021
  
  IPOs have been the favoured route for PE/VCs to exit their investments. Over the last 5 years we saw PE/VC exits of $800 million to $1.8 billion every year through the IPO route
  
  Tailwinds for the primary market


• There is bullishness in the equity market in India. This is due to favourable economic policies of the Government, expectations of rebound in GDP growth in FY 2021-22 (8.3% as per latest World Bank estimates). This has resulted in persistent FII interest in Indian equities.


• Capital supply is expected to remain strong on the back of strong FII inflows (Rs 10,000 net investment in month of June, source: Money control), ongoing EPFO investments in equities, and shifting investment preference of Indian households from physical assets to financial assets.


• The Government has planned for aggressive disinvestment target in the Union Budget for FY 2021-22. Though the disinvestment process may get slightly delayed due to the second COVID wave, it will provide a further boost to the primary market.


• India has seen more than $100 billion of investments through the Private Equity / Venture Capital route in the last 5 years (source: Edelweiss Mutual Fund). With buoyancy in the stock market (trading at all time highs), the primary market is expected to remain buoyant.


• Conglomerates have been listing their subsidiaries through IPOs to unlock their value. We are likely to see more of this trend with rising demand for capital and favourable market conditions.

Why invest in IPOs?

• Potential to outperform the broader market: Edelweiss Recently Listed IPO Fund has outperformed both Nifty 50 and the broader market (Nifty 500) over different time-scales (ending 30^th June 2021) since inception (please see the chart below). You can see that the scheme created significant alphas for investors over various timescales.
  
  

  Source: National Stock Exchange, Advisorkhoj Research (Period: 27.02.2018 to 30.06.2021). Returns over 1 year are annualized (CAGR). Disclaimer: Past performance may or may not be sustained in the future.

  
  


• Listing gains: Often the opening day market price of a stock being listed is higher than the IPO price. This is known as listing gains. Many investors subscribe to IPOs just for listing. Many times investors are rewarded with listing gains. Edelweiss Recently Listed IPO Fund also enjoyed net listing gains in the IPOs that were listed in the life of the scheme. But there is no guarantee that closing price of a stock on listing day will be higher than the stock price. Investors should have a long term investment horizon for this scheme.


• Post listing gains: There is considerable potential of post listing gains of IPOs. Only a small percentage of the return of Edelweiss Recently Listed IPO Fund is attributable to listing gains (source: Edelweiss Mutual Fund, as on 30^th April 2021). Most of the returns can be attributed to post listing gains The performance of Edelweiss Recently Listed IPO Fund over different time-scales since inception (see chart above) shows that recently listed IPOs have the potential to outperform the broader market even after listing. This has been seen across sectors like technology, automobiles, pharmaceuticals and private banks (source: Edelweiss Mutual Fund).


• Investing in new age businesses: Investing in IPOs gives you the opportunity to invest in new age businesses within traditional industry sectors. With potential of greater adoption, consumer awareness and business maturity, favourable demographics and rising per capita income there may be scope of superior earnings growth in such businesses. Examples of new age businesses in various industry sector are:-


• Technology: Digital, internet, gaming etc


• Telecom: Equipment manufacturers, value added service providers etc.


• Healthcare: Diagnostics, biotech, complex generics etc.


• BFSI: AMCs, insurance, cards, wealth management etc.


• Capital goods: Electronic goods.


• Consumer: Luxury brands, retail chains etc.

Performance of Edelweiss Recently Listed IPO Fund

The chart below shows the growth of Rs 10,000 investment in Edelweiss Recently Listed IPO Fund since the scheme inception (as on 30^th June 2021). In the last 3.3 years (as on 30^th June 2021) your investment would have grown to nearly Rs 17,000. The scheme CAGR since inception is nearly 17%.

Source: Advisorkhoj Research (Period: 27.02.2018 to 30.06.2021). Disclaimer: Past performance may or may not be sustained in the future.

Why invest in Edelweiss Recently Listed IPO Fund?

• Access to potential IPOs: IPOs which have high potential for listing gains and future growth are heavily over-subscribed. Even if you, as a retail investor, subscribe to these IPOs, chances of getting the desired allotment are low. You can have better access to IPOs through Edelweiss Recently Listed IPO Fund


• Invest in the right IPO: Many investors take listing gains as granted when they subscribe to IPOs and many are disappointed. You need to invest in the right IPO for listing and more importantly, future gains. Edelweiss Mutual Fund follows a rigorous bottom up research process for selecting stocks based on growth and quality of business.


• Get Post listing gains: Many investors subscribe to IPOs only with the view of getting listing gains. This, in our view, is a wrong approach for IPOs. If you exit on listing day, then you are likely to miss out on a big part of the gains. The chart below shows the performance attribution of Edelweiss Recently Listed IPO Fund since scheme inception (as on 30^th April 2021). You can see that most of the returns of the fund can be attributed to post listing gains.
  
  

  Source: Edelweiss Mutual Fund (as on 30^th April 2021). Disclaimer: Past performance may or may not be sustained in the future

  
  


• Strong performance track record: Edelweiss Recently Listed IPO Fund has a strong performance track record over the last three and half years or so. The scheme has outperformed Nifty and the broader market, creating alphas for investors (see above).

Conclusion - Who should invest in Edelweiss Recently Listed IPO Fund?

• Investors who are seeking capital appreciation by investing in recently listed and upcoming IPOs


• Investors with high to very high risk appetites


• Investors with minimum 3 to 5 years investment horizon


• Investors should consult with their financial advisors if Edelweiss Recently Listed IPO Fund is suitable for their investment needs.


• Data source https://www.edelweissmf.com/Files/downloads/Product%20Collateral/Presentation/2021/May/published/Edelweiss-Recently-Listed-IPO-Fund-Presentation_10062021_124726_PM.pdf