Summary
Some IPO metrics that are significant for evaluating a public offering include the size of the issue and the price of the issue. While the price of the issue dictates the price at which each stock is issued, the size of the issue indicates how much a company hopes to raise by issuing its shares to the public.
Introduction
What causes some IPOs to be offered at the size of just a few hundred crore rupees, while some are offered in the range of thousands of crore? What is an issue size? Is a larger size more beneficial for IPOs, or can smaller sizes also offer advantages to investors?
The answer to this dilemma is to know more about the issue size. It is a piece of information included in every IPO, and it greatly helps to decide on the amount of capital that a company intends to generate from the public through the issue.
If you are researching an upcoming IPO, you should know about the issue size to comprehend the motives of the issuing company better.
What is the Issue Price of an IPO?
The issue price refers to the price at which stocks are offered for purchase to investors during the IPO process. If the IPO is through a fixed-price offer, then the price is determined beforehand for the lot size in the share market. When the IPO is conducted through the book-building method, a range of prices is set.
For example, let us say that in an IPO, the issue price of the stocks is ₹500 and the minimum application lot size is 30 stocks. Thus, to apply for this IPO, you will have to make an investment of ₹15,000 (₹500 × 30).
Factors that Determine Issue Price in an IPO
The issue price is not arbitrary. Investment bankers and company promoters arrive at it by evaluating several variables:
- Financial Performance: The performance regarding revenues, margins, and leverage ratios will influence the value proposition put forward by the company.
- Growth Opportunities: Increased valuation levels can be expected from companies operating within rapidly growing industries or companies with strong order pipelines.
- Industry Peers: Listed peers on the NSE and BSE provide guidance for valuation for pricing purposes.
- Market Conditions: Market sentiments prevailing while making the filing decision influence the openness of the investor to the proposed price band.
- Investor Demand: For book-built issues, the demand from QIBs, NIIs, and retail investors during the auction period impacts the final cut-off price.
Issue Price Versus Market Price
These are two of the many IPO terms that are very often confused. The issue price is fixed and applies only during the IPO subscription period. The market price is what the stock trades at once it lists on the exchange, and it shifts every second based on buy and sell orders. Comparing the two after listing is one way investors assess whether the IPO was fairly priced to begin with.
What is the Issue Size in an IPO Process?
The issue size of an IPO refers to the total amount of funds that the issuing firm seeks from its stakeholders via the public offer of its stock. This will enable the stakeholder to gauge the size of the IPO.
What Influence Does Issue Size Have on Allotment?
Here’s how the issue size influences allotment:
- The size of the issue will determine the total number of shares issued.
- The bigger the size of the issue, the greater the number of shares allotted.
- A small issue size will result in stiff competition among the stakeholders when demand is high.
- Allotment will be dependent on the size of the issue and the total number of applications.
How Does the IPO Allotment Process Work?
A quick overview of how IPO works:
- Application by investors occurs during the IPO subscription period.
- Upon expiration of the application period, all applications for subscription will be evaluated by the registrar.
- Share allotment is dependent on SEBI norms as well as the needs of the investors.
- If the offer is oversubscribed (greater demand for the number of shares offered), allotments may be lower than the number of shares applied for, and in some cases, there may be no allotment at all. You can use some strategies to increase your chances of IPO allotment.
How Issue Size Can Impact Allotment and Returns?
- A small issue size with strong investor interest can lead to heavy oversubscription.
- Greater oversubscription would mean a smaller likelihood of obtaining allotments.
- The size of the issue would affect demand and, consequently, its movement in the stock market upon listing.
- Nevertheless, returns from the investment are not dependent solely on issue size.
Scenario A: Small Issue, High Demand
Let us suppose that the company makes an IPO of ₹250 crores with a price of ₹200 per share.
- Retail investors’ share is equal to ₹87.5 crore.
- With a minimum lot size of 75 shares (₹15,000 per lot), around 5.8 lakh lots are available.
- When the number of retail applicants is equal to 87 lakhs, the issue is 15 times oversubscribed.
Scenario B: Large Issue, Moderate Demand
Now consider a company raising ₹4,500 crore, with retail demand reaching 3 times the available shares.
In this situation:
- More shares are available for investors.
- Most applicants bidding for the minimum lot size are likely to receive an allotment.
- Listing-day price movements may be relatively stable, although positive returns are never guaranteed.
Tips for Making an Informed Investment Decision
When it comes to IPOs, bigger isn’t always better. While some businesses seek a few hundred crores, others aim at raising thousands. This is why it’s always important to dig deeper than just the figures. Below is a list of steps to follow in evaluating the success of IPOs:
- Purpose of the Fundraise: Determine the purpose of raising capital from the IPO process to expand, repay debts, get working capital, or meet any other needs of the firm.
- Company’s Financial Strength: Look into the growth trends of the company’s revenues, earnings, and debt to find out how well the company is doing.
- Understand the Valuation: Examine the IPO price relative to the valuations of similar listed firms to determine whether it is under- or overvalued.
- Examine the Red Herring Prospectus (RHP): It will provide useful information about the company’s business, risks, financial performance, and future.
- Don’t Invest Only Because of Hype: There are instances where IPOs attract too much attention because of media interest or oversubscription. The numbers alone should not determine the choice of investment.
- Match the Investment to Your Needs: In analyzing your resources, check if the investment in an IPO matches your risk profile, timeframe, and goals.
Conclusion
Price and the volume of the issue provide valuable information about an IPO, which is not limited to news reports or market trends. The price represents the value that the shareholder will pay for each stock, whereas the issue volume denotes the amount of capital that the company is planning to raise through its IPO.
Both factors should not be studied separately because, in order to take the right investment decision, one has to study several important elements relating to the company. These elements could help to identify profitable investment opportunities and create a strategy.
Key Takeaways
- Issue size refers to the total capital that a firm wants to raise via its IPO, whereas issue price is the cost at which an investor buys shares.
- Understanding issue size assists investors in assessing the fundraising goal, allotment capability, and the size of the entire IPO.
- A relatively smaller issue size may yield high oversubscription rates, but larger issue sizes can normally result in a higher allocation ratio.
- The basic idea behind the assessment of a company’s fundamentals, value, finances, and fundraising goal comes first before making any decision regarding an IPO.
