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Whenever a company goes public through an IPO, one of the most vital decisions is setting the right price per share for investors. This price is called the face value or offer price. Understanding what face value is, how it gets fixed during an IPO, and why it matters to investors is crucial. This complete guide will explain face value in simple terms to help you grasp all its key aspects before investing in an IPO.
An overview of face value in an IPO?
When a company decides to go public, one decision they need to make is what price to sell their shares at to investors in an IPO. Imagine ABC Company is launching its IPO. And let’s say ABC sets the face value at ₹100 per share. Any investor wanting to get in on ABC’s IPO can apply to buy shares at ₹100 each.
So, the face value is just like the ticket price set by ABC for investors to come aboard when it goes public. The higher the face value, the more money ABC raises. But it must also be priced attractively enough for investors to show interest. That’s what determining the face value is all about!
How is face value for an IPO determined?
Several factors help finalise the face value during an initial public offering:
- Recent private share value
Most companies aren’t just born public – they start out private first. And as a private firm looking to grow, it will raise early funding from private investors to build up the business. Now, these private investors buy company shares at some price. When the time comes for the company to later go public through an IPO, that earlier private share price provides helpful context on how to value the IPO.
In most cases, the IPO face value is set at about 1.1X to 3X times the company’s latest private share value. So, if the last private funding round valued shares at ₹50 each, expect the IPO price to be in the ₹55 to ₹150 range.
- Company financials
Key financial metrics like revenue, profitability, growth rate, and future prospects play a big role in deciding the company’s perceived value amongst investors.
Strong past financial performance and future growth guidance from management help justify a higher IPO face value. Some bankers may even adopt a discounted cash flow model to arrive at a pricing recommendation.
- Market conditions
The overall state of capital markets and investor sentiment towards IPOs heavily influence face value decisions. When broader markets are upbeat, and IPO appetite is strong, companies can afford to be more aggressive with the offer price. But lower pricing may be necessary to fundraise in volatile or risk-off environments.
For example, the IPO boom of 2021 in India saw historically high face values across issues. However, issues in 2022 required pricing adjustments to account for market turbulence.
- Peer or competitor analysis
Investment bankers meticulously assess the face value at which peer companies recently went public. The offer prices in similar sector IPOs act as an important benchmark.
If a company is the first in its industry to go public, analysing the pricing of adjacent sector IPOs takes priority in decision-making.
- Investor feedback
The company and its investment banks also try to assess probable demand levels through investor meetings and roadshows. The feedback on valuation and pricing helps gauge appetite and build order books.
Before finalising the offer price, many bankers launch pre-IPO syndicate financing rounds to understand potential demand.
- Underwriting considerations
Since underwriters and brokers also subscribe to an IPO, they analyse pricing in terms of overall capital raised and aftermarket performance. Higher face value means less equity dilution for the company. But very high pricing can also reduce allotment chances in oversubscribed issues. So, banking partners advise on a balanced approach.
As you can see, face value pricing involves a holistic assessment of multiple factors and striking the optimum balance. The goal is to raise growth funds while ensuring strong investor interest.
Too low leaves money on the table, and too high may turn off potential subscribers.
Indicative Price Band vs Final Offer Price
In the draft offer document submitted to market regulators, companies provide an indicative or expected price range within which they plan to finalise the IPO face value.
For example, a company may indicate the price band as ₹80 – ₹90 per share, signalling the final offer price to be within that bracket.
However, this is still a tentative range, and the actual binding face value is only finalised before share allocation based on demand patterns.
The final IPO face value may be above or below the indicative band depending on overall investor feedback, market conditions and underwriting considerations.
So don’t get fixated on the indicative range, which acts only as a directional guide. The final offer price is what matters!
Does face value change after listing?
Once the shares are allotted in an IPO at the offer price, they get listed on the stock exchange for trading. The market value after public listing differs greatly from the IPO face value.
More often than not, overwhelming demand results in a big jump in the stock price over its IPO face value on the listing day. This first-day spike is called IPO underpricing.
Seeing a stock open at a solid premium of 10-50% above its issue price on debut is quite common in hot IPOs. Strong grey market buying interest pre-listing indicates the potential for underpricing.
For example, a stock with a face value of ₹75 in the IPO opens at ₹112 on the listing, up 50%!
But in some cases, weak demand may also lead to overpricing, where shares list lower than the IPO price band on debut.
Either way, the IPO face value is the reference point for discovering the company’s true market value as buying and selling kick-off post-listing.
Why evaluating face value matters for IPO investors?
Assessing the fairness of face-value pricing is important for several reasons:
- It tells you the implied valuation or market capitalisation at which the company is entering the public market. You can gauge if it aligns with fundamentals.
- Comparing face value with the indicative price band gives you a sense of the potential upside based on likely underpricing on the listing.
- A higher offer price reduces allotment chances in an oversubscribed issue. So you can manage application sizes accordingly.
- Analysing face value and expected listing pop helps time your application if aiming to flip allotted shares on debut.
- For existing private investors, face value sets the acquisition cost of their unlisted holdings now coming into the market.
- Clearly, the IPO offer price has multiple implications for both new investors and current shareholders participating in the public issue.
Face value indicates a company’s implied market value or capitalisation during its public market debut. Analysing the IPO offer pricing and expected aftermarket movement helps investors gauge upside potential and make informed application decisions.
While face value provides the entry point reference, the journey of listed share prices is determined by business growth fundamentals, execution track record and market dynamics.
So, next time you come across an exciting IPO opportunity, don’t forget to assess the face value pricing before jumping in! Let me know in the comments if you have any other IPO questions.
The company’s founders decide the face value of each share when the company is established. It’s a fixed amount and doesn’t change, regardless of the market conditions.
No, they are different. Face value is the original value of a share, while market value is its current price in the stock market, determined by supply and demand.
No, the face value remains constant. Changes in the market do not affect it. However, market value can fluctuate based on market conditions.