Leveraged High Yield Individuals (HNIs) would be praying for the same thing, following a strong NII underwriting to both issues.
HNIs are proportionally allocated shares in an IPO. It means that if the issue is subscribed 100 times in the Non-Institutional Investor (NII) category, then an HNI offering for 100 shares will be allocated only one.
For the Happiest Minds issue of Rs 702 crore (issue price Rs 165-166), the NII share was subscribed a whopping 351.46 times, while for the Rs 600 crore Route Mobile (issue price Rs 345- 350), it was 192 times.
Most HNIs do not contribute the full amount of the offer on their own and instead take advantage of leverage. That is why they mostly invest on the last day of the bidding process to avoid paying interest for a greater number of days. Typically, they invest for seven days. Often times, your cost of financing IPO offerings exceeds the trading earnings of a stock.
“The amount of money that HNIs leveraged on these issues make depends on the days for which they have borrowed, at what interest rate and if that can offset the trading gains. Generally, the average cost is 7-9 percent per year. HNIs make assumptions about two things: the listing premium and the number of times the issue was subscribed.
“If a problem is asking for a higher band price of Rs 100 and HNIs expect a listing price of Rs 120; to get that Rs 20 profit, they have to assume up to what level of oversubscription they should apply to make money, ”said Deepak Jasani of HDFC Securities.
Unlisted Zone’s Dinesh Gupta shared the Happiest Minds and Route IPO matrix to suggest how HNIs make IPO decisions based on their assumptions:
Currently, the gray market premium for Route Mobile shares stands at Rs 194-197 per share and that of Happiest Minds at Rs 142-146 per share, said Dinesh Gupta of Unlisted Zone.
Understanding the HNI game
To break even for HNIs, Arun Kejriwal, a director at the investment advisory firm KRIS Capital, gave the following example.
Assuming a HNI has borrowed money at an interest rate of 7 percent, for the route IPO with 192.81 times the subscription and the upper band price of Rs 350, the cost of financing would be Rs 90.59 i.e. Rs 350 (issue price, say) X 192.81 (number of times subscribed to) X 7/100 (assuming 7 percent interest rate) X 7/365 (assuming money borrowed for seven days ).
The breakeven point for HNIs taking the leverage to bid for Route Mobile’s IPO at 7 percent for seven days comes to Rs 350 + 90.59 or Rs 440.
With a gray market premium of Rs 194-197, as suggested by Gupta, HNIs could still expect listing gains of Rs 103.41-106.41 on the subject.
If the interest rate for HNIs investing in Route Mobile’s IPO were 8 percent, the cost of financing would have been (350 * 192.81X7 / 365 * 8/100) or Rs 103.53. It means that they would need a listing price of Rs 453.53 to cover expenses.
Similarly, for the Happiest Minds IPO at an issue price of Rs 166, 351.46 times the subscription, a seven-day leverage and a 7 percent interest rate would add Rs 78.32 to the cost of HNI. The issue premium is Rs 142-136 per share. The breakeven point in this case would be 244 rupees (ie 166 rupees plus 78.32 rupees). Adding in the gray market premium, an HNI would still generate a profit of Rs 63.68-67.68 per share.
History suggests that there were at least 30 other IPOs, in which NIIs exceeded category quota by 100 times in the last five years.
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