Why companies go the IPO route
Why companies go the IPO route
Hello Friends and Welcome to another exciting podcast by Angel Broking.
Doston, have you ever wondered why companies go public? Aakhir IPOs mein, expenses kaafi rehte hai, aur phir saare shareholders ka dhyaan company pe rehta hai. Sounds like a lot of stress. Toh obviously companies must have very big reasons for hosting an IPO. There are broadly two reasons behind why a company goes the IPO route. A company may go public for one of these reasons, or a combination of them.
Before we begin, are you wondering: company ke IPO karne ke reasons mujhe kyun jaanna zaroori hai? Logical question I guess… Well, the company is asking for your money. You should know what they plan to do with it, taaki you can evaluate. Kya mai iss cheez ke liye paise dena chahta hu? Kya yeh logical investment hai? Kya yeh investment mein growth potential hai? Of course, of course, IPOs allow you to buy shares at a low price and POSSIBLY sell at a "much higher price" lekin the company has to have potential for growth. Do remember, ki zaruri nahi hain that you are buying at a low price, this just represents the general hope that surrounds a new IPO.
These companies have to be able to show some profits for the stock price to keep an upward trend...dusre market conditions bhi sahi rehne chahiye lekin yeh hai basic selection criteria.
Toh chalo, abhi aap jaante ho why it is so important to know the reasons why a company is going for an IPO.
Chaliye, let's find out the reasons.
Reason number 1 - to raise capital
The commonest goal for hosting an IPO is to acquire capital from the public. However, capital raise karne ki kahi saare motivations ho sakti hai… some that are seen positively by shareholders and others, not so much.
Companies may choose to raise capital to acquire other companies. Similarly, An IPO might also be aimed at raising capital for expansion into new markets or to build upon existing markets. Iss tarah ke reasons sun ke shareholders optimistic ho jate hai kyunki capital used for expansion usually holds the promise...actually the potential... of a good yield on investment.
• Zomato has plans for an IPO of Rs 8250 crores. Company ne Red Herring Prospectus mein commitment diya hai ki IPO proceeds mein se 75% expansion mein use hoga aur 25% general corporate expenses ke liye use kiya jayega.
Banking and finance companies tend to host IPOs to expand their capital base to fund future capital requirements.
• 2020 mein SBI Cards ne IPO kiya aur Red Herring Prospectus mein bataya tha ki proceeds will be used to expand their financial base, with the goal of meeting future capital requirements
• Yeh saal, Fincare Small Bank ne issi tarah Red Herring Prospectus mein mention kiya hai ki proceeds will be used to build upon their tier 1 financial base, with the goal of meeting future capital requirements. Yeh bank ke example main dobaara mention karunga when speaking about the second reason (other than the need to raise capital) that companies go the IPO route
Anyway, back to the first reason that companies go the IPO route, that is to raise capital - and within that we're looking at the various reasons that they might want to raise capital ...just to recap.
Capital raise karne ka dusra karan reh sakta hai - debt settlement. Ussi tarah corporate expenses ke liye bhi, companies can decide to host an IPO. Many companies also plan for some expansion with the proceeds from IPOs kyunki debt settlement and managing expenses might be seen as attractive or lucrative for investors.
That said, debt repayment and corporate expenditure can be common reasons for companies to host IPOs, if you look at the Red Herring Prospectus details about what purpose proceeds will be used for. Investors company ka overall potential aur past financials dhyan se dekh ke invest karte hai.
Let us consider the following examples:
• Go First Airlines has filed its Red Herring Prospectus for an IPO of Rs 3600 crore. The proceeds will be devoted to settlement of the airline's dues.
• Ussi tarah, Supriya Lifesciences kar ke ek pharma company ne apne Red Herring Prospectus mein mention kiya hai ki IPO proceeds will be used for funding capital expenditure and debt repayment. The pharma company plans for an IPO of Rs 1200 crores. We'll talk more about this company in a few minutes.
• Devyani International ka naam mujhe pata nahi ki aapne suna hai ki nahi, lekin it's huge! It is the company that represents or is a franchisee - the largest franchisee - of Pizza Hut, KFC and Costa Coffee. Inke bhi IPO host karne ke plans hai and they say that net proceeds will go towards settling its debts and corporate expenditures.
Reason number 2 - to allow existing shareholders to exit
A lot of companies manage to get their business off the ground because of capital pumped by initial investors. This is known as private equity. Yeh investors company ki shuruaat mein hi company ke shareholders ban jate hai - before it goes public while it is still a private limited company. Jis time tak company IPO ke liye ready ho jata hai, these investors would have sometimes reached their investment target and as a result, they may decide to put their shares on the market.
• For example, CAMS held an IPO last year and mentioned in its Red Herring Prospectus that proceeds of the IPO would go to selling shareholder NSE investments, allowing them to exit.
• Yaad hai kai minutes pehle we talked about Supriya Lifesciences? In ka - if you recall - Rs 1200 crore ka IPO plan hai. Of this, only Rs 200 crore is a fresh issue. The other Rs 1000 crore is an Offer for Sale by the company's promoter.
• Ek aur company that we said we'd talk about when discussing the second reason why companies go public…. Fincare Small Bank. Like Supriya Lifesciences, this company too is pursuing both goals - raising capital aur uske saath saath promotor ko exit karne ka possibility. IPO ka total amount hai Rs 1330 crores of which - once again - Rs 1000 crores promotor ke taraf se OFS hai.
Now you know why companies go public. Agar aap IPO mein invest karne mein interested ho toh do remember these 2 things-
1. Read the red herring prospectus very carefully.
2. Do analysis of the company's financial history.
Toh dosto aaj ke podcast mein itna hi. Fir milenge jald, for much such informative and educational content about upcoming IPOs in July, and other insightful IPO content, stay tuned! Until then, goodbye, stay safe, and happy investing.
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