IPO – Journey of a small company to a big company in 5 years

Pan-India presence, diversified products, business expansion, stronger brand presence, and a promising growth trajectory, in pursuit of these dreams, Ankur started his own firm ‘Dream Big’ in 2009. Things were smooth, profits consistent, but was that going to make Ankur happy, the answer is no. Rest assured, he wouldn’t have heaved a sigh of relief until he achieved his objectives for Dream Big.

 

Let’s look at what he needs to expand his business, diversify product portfolio, and increase brand presence. Ankur needs capital to move things forward. Let’s put some numbers together to understand the scenario better. Let’s assume that capital required for business expansion is Rs. 110 cr. Retained earnings available were Rs. 10 cr, leaving a fund deficiency of Rs. 100 cr. Ankur approached his banker for a term loan of Rs. 50 cr, which still left him with a fund deficiency of Rs. 50 cr. Ankur had already borrowed Rs. 25 cr from his banker. Therefore, it was not prudent for him to borrow an additional Rs. 50 cr, since it would increase the debt element as well as the interest expense.

 

In this scenario, Ankur’s finance team recommended him to raise the funds through an initial public offering (IPO). The team advised Dream Big to go public by entering the stock market. Ankur liked the advice and laid out a plan along with his entire team. The funds required amounting to Rs. 50 cr were divided into 50 lakh equity shares of Rs. 100 each. In 2011, Ankur decided to offer these privately held shares in Dream Big to the public at large through an IPO. IPO is a mechanism used by private companies to raise funds by issuing shares to the public by offering them ownership in the company to the extent of shares subscribed by each investor.

 

Ankur followed all the mandatory procedures required as per SEBI to float an IPO and made the issue. Dream Big raised the required funds through the IPO. The management decided to repay the earlier bank loans of Rs. 25 cr from the IPO proceeds first. This reduced the debt levels of Ankur largely giving his company much more breathing space. The profitability improved owing to lesser interest component due to loan repayment, which Ankur could pass on to his IPO investors through dividends. The company used the rest of the funds to start new outlets in 15 different locations in India, which helped Ankur a largely in expanding his business while increasing his brand presence. Currently, the impetus that the IPO provided to Ankur’s company has helped it become a Rs. 500 cr company in 2016, with much brighter prospects.

 

IPOs can propel a small company within a short time span of 5 years into a big company. Today, Ankur has not only achieved his dreams, but has developed stronger vigour and wherewithal to Dream Big. Investors in Dream Big reap good and consistent dividends and the share trades at Rs. 200 on the Indian indices. Therefore, those early-bird investors in the IPO have doubled their investment in 5 years while those buying the shares from the open market now will pay a higher price. Ankur’s success story clearly signifies the role played by an IPO both for the company as well as the investors. However, IPO investments can be subject to market risks, please read the Red Herring Prospectus carefully, do your homework on the company properly, or even seek professional advice before investing.

 

Happy Investing!

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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  • Nice and detailed article thanks for putting such a great content

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