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Tips to Apply for an IPO

Published by Octron on June 9, 2009

After popular article, 5 tips to get money for an IPO, now I am sharing basics of how to apply for an IPO. These are the rules which I follow and advise everyone to follow while applying for an IPO. As majority of companies listed in NEPSE are banks or financial institutions, I would like to share some basic tips for buying any bank or financial institution shares. For this article lets focus upon IPOs (Initial Public Offering), what you need to know before application and how to apply.

If you are applying for an IPO check the company’s net worth first. If you can read the financials, its better, if not ask someone who knows it. Know who are the promoters of the bank and what was its initial capital? If a bank is trying to float shares much more than its promoters investment, then you need to check more into promoters background. Are they from sound industrial or financial background who have already made mark in Nepali Economy or are they some Ram, Hari ?

Apart from financial jargons, try to do bit research on the basic stuff;

Bank’s Client base & customer satisfaction: Ask them how many clients do they already have. Reduce their staff, promoters account. For any bank to release an IPO they should have at least 3000 – 5000 clients in the main branch. Just make an sudden visit to the bank during rush hours, see the flow of clients, how they are handled. You many even open a 0 balance account to deduce total Customer Nos.
Services: What kind of services are they offering ? Are they offering Deposits, Loans, Remittance, Western Union, ATMs, SMS, Online Banking, etc. Do they have any special packages which make them stand out of the hurdle? More the services, better it is for the banks growth. People will have options and will prefer to work with such banks.
Location: Where is the bank main office located ? Is it in capital or outside somewhere in Biratnagar or Birgunj ? If you are capital applicant it fells bit secure to know its main branch and head office is in capital. Also you can get any news (good or bad) regarding the bank quickly if both bank headquarter and you reside in same city.

Apart from main branch, where are other branches located?
Get the idea of it. Are they in neck to neck competition in terms of location with already established banks like SCB, NABIL, NIB. Plus are they also going to places where none of other banks have ever made their footprint?
For e.g. one of the major reason for the success of sunrise bank IPO was it had 20 branches before launching IPO, that too in places where no other banks had dared to make footprint – Gairidhara, Gabahal, Tinkune in capital plus on major city centers like New Road, SuryaVinayak, Pokhara Lakeside, etc. They first made their mark on barren lands, then they built upon the competitive areas.
Investment & Work Area: Where is the bank putting all its money, is it just bearing loss with huge sum of deposit interest?
Real state, colony/apartment constructions, hydropower, etc are some of the popular investment areas that a bank indulges itself these days. Though such information hardly appears in the newspaper, keep yourself updated through their press releases, annual reports or their website.
One negative news : Try to google for one negative news about the company, if you have missed to read it from papers. One negative news about the company might be enough to give you an overall idea of the company and its future prospects. Be it management issues like conflict between employer and employees, too much job hopping staffs, etc or financial issues like too High Non Performing Loans, Notice of auction of collateral regularly in the paper, old promoters abandoning and new ones entering, etc

Basically, IPOs are very secure form of investment and if you could do even 20% of above mentioned research, you wont be in trouble. For e.g. recent release of Madhyamanchal Bikas Bank IPO, regular players stayed away from it as its net worth was negative and the bank itself was going under management problems. There was news on papers regarding hornlock between the staff & bank authorities. Plus Bikas banks are notorious to accumulate huge Non Performing Loans & finally write off those loans.

While average players with herd nature, simply put everything they have to apply. All they think is NONE OF THE BANK has gone BANKRUPT in Nepal. Even if its net worth is negative it will hover around 300-400. Which means 3 times profits, so why not apply?

Ok, so far we have looked over the criteria’s now what is the optimum way to apply for any IPO;

As is lottery, your chances of getting share increases with the number of application forms. Always try to divide your total investment amount into maximum no. of applications that you are going to submit. Suppose you want to apply for Rs. 1,00,000 (@ Rs. 100/share), its always better to divide the sum into 5 applications(Rs. 20,000 each) under different people names (family members, family friends, etc) than single application (Rs. 1,00,000).

Intervals	50	51-100	101 – 200	201-500	501-1000	Above 1000
Avg. Actual Allotment	10	20	40	100	200	200+
Applications	45%	30%	25%
Allotment	50%	30%	20%
Optimum Application Scenarios				Forms	Share. Qty	Amount (Nrs.)
Nos of Applications (Qty)	1 (50)	1 (60)	1 (110)	3	220	22,000
Nos of Applications (Qty)	2 (50,50)	2 (60,60)	1 (110)	5	330	33,000
Nos of Applications (Qty)	2 (50,50)	3 (60,60,60)	-	5	280	28,000
Nos of Applications (Qty)	1 (50)	1 (60)	2(110,110)	4	330	33,000
Nos of Applications (Qty)	…	…	…	…	…	…

The above table shows various application ranges, with Avg. Actual Allotment shares (based upon past IPO results) along with Application density and allotment probability. For. e.g. The most applied range is ’50′ and generally out of all applications 45% of applications are for 50 shares. So, most issue managers allot 50% of total IPO shares to this category. Even though, they get only ’10′ shares in average cases due to high over subscription. The actual allotment number might still be lower. So whenever you fill up the application then do always fill at least one form for ’50′ shares. This interval is the most allotted one. Second to it is ’51 – 100′. Either you fill up application for 60 shares or 100 shares; you will always fall under this category. So, there is technically no difference whether you apply for 60 shares or 100 shares, both have same probability to get SAME number (mostly 20) of shares.

There are various scenarios shown above in table while applying for the IPOs. There can be lot more based upon your budget. You can induce one which suits your investment capital from above three examples.

Next Week: When & How to Buy Bank shares in Secondary Market ?

PREVIEW:

Every now and then people ask me is it right time to buy ABC shares, or XYZ shares and some people even just vaguely ask whether its time to buy any stock ?
Well, for someone who has been market for more than four years, it’s still difficult question to answer. It is a daunting task to discern the right company, time, price and even quantity to buy a share. But if you can do that math, then simple answer is – EVERYDAY is right time to buy a stock and that’s what have been going on in our market. Despite being a calculative market, trading based upon facts & figures, NEPSE is driven by many more factors apart from financials, scoop leaks of right shares and bonus shares. There exists more than 20% of players in the market with herd nature, who would pawn everything just based upon the rumor (not financials & other factors) and another 20% who never cash any opportunity (buys in high and bear loss withholding it)….

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