Octopus Digital’s oversubscribed initial public offering indicates strong investor demand for the company’s stock, but also showcases a pricing miscalculation that may prove detrimental to the company in the long-run.
The IPO was oversubscribed by 27 times by the time it concluded a two-day book building phase on September 10.
It received Rs. 745 million in a bid volume against the IPO’s share size of Rs. 27 million, with its closing price clocking in at Rs. 40.6 per share, 32 percent higher than its set IPO price of Rs. 30.6.
This meant that Octopus Digital set a record for being the most oversubscribed IPO in Pakistan’s history.
The IPO’s success means that the company will be able to use the capital it raised to expand its business and operations.
However, the fact that the IPO is oversubscribed to such an extent means that its stock was significantly underpriced.
In an article, a national daily calculated that Octopus Digital’s valuation is about Rs. 90 per share and, in terms of forward multiple, is in the range of Rs. 110 to Rs. 140 per share. Thus, the company’s set IPO price could not have been set at anything below Rs. 70 per share, the newspaper said.
IPO’s are often underpriced when underwriters either deliberately want to boost demand for shares or if they’ve accidentally underestimated investor demand.
This may lead to an oversubscribed IPO in which demand for the undervalued stock exceeds the total available supply. When this happens, companies can offer more shares or raise the share price, to meet demand and raise more capital.
When an IPO is only slightly undervalued, this can be beneficial for the company as it attracts high demand and publicity. However, if the stock price is significantly undervalued, as in the case of Octupus Digital, the company can end up losing out.
For example, if a company offers shares at $20, but the market is willing to pay $60 for it, investors will buy shares at the undervalued price and then sell those shares for higher prices. Although investors will benefit, the company will lose out on the extra $40 they could have earned had they priced their stock accurately.
Suban Iqbal, an equity dealer, said that the book runner “underestimated the range probably based on a conventional basis and did not assess the actual market demand” as Octopus Digital’s IPO was the first tech IPO in Pakistan in seven years. The company could have earned more money if the initial valuation had been higher, he added.
Iqbal explained that IPOs that are significantly oversubscribed aren’t beneficial for the company, as they raise less capital than they could have, and aren’t good for investors either, as they aren’t able to buy the number of shares they initially desired.
If an IPO is oversubscribed, all applications from investors cannot be accepted, which means that many investors won’t be able to receive the number of shares they initially bid for, and some may not receive any shares at all.
“The cap price could have been higher due to significant interest,” an analyst anonymously told ProPakistani, adding that some investors had to bid up to 20 times to get the 5 percent share they wanted.
Ideally, companies seek to determine an accurate stock price for IPOs, so they can earn as much money as possible. They do this by factoring in the company’s earnings, sales, cash flow, and future marketability.
If the IPO set price ends up being overvalued, the offering can end up failing to attract enough demand. In contrast, if the price is significantly undervalued, demand outweighs supply, and the company may end up raising less capital than it could have.
This showcases the importance of determining an accurate initial price for IPOs in Pakistan so that both investors and companies benefit as much as possible.
Its 2021 scam. A couple of years back they were nothing and still they are nothing. Just capitalized on parent’s contacts. Hats off to the investors who hardly know about Cloud AI and ML and subscribing for it. Foolish retail will again hold the dirty end of the stick.