We analysed the performance of 45 IPOs between January 1, 2016 and August 31, 2017 to figure out the broad trend. Share prices as on October 10, 2017 have been taken into account to calculate the gains and losses.
Over the last year and a half, the stock market has been consistently making new highs, unfazed by a slowing economy, weak earnings, geopolitical tensions, and foreign fund outflows. That has had many unlisted companies making a beeline for the initial public offering (IPO) market.
The IPO fever seems far from over given the increasing number of applications received by SEBI almost every other day.
We analysed the performance of 45 IPOs between January 1, 2016 and August 31, 2017 to figure out the broad trend. Share prices as on October 10, 2017 have been taken into account to calculate the gains and losses. The key inferences are as under:-
Listing gains were visible in 33 issues, whereas 12 companies failed to make their presence felt. Here’s a list of stocks where the listing at the bourses was stellar (minimum 30 percent listing gains):-
Clearly, investors didn’t mind paying a premium as long as the company had a strong brand recall or a compelling set of fundamentals.
Some of the other decent gainers (10-30 percent listing gains) on day 1 of their listing are as follows:-
With the exception of Avenue Supermarts, stocks that managed to deliver very good returns (minimum 50 percent) from the first day of listing till date aren’t necessarily the ones that delivered a substantial upside on the day they were listed, as indicated by the exhibit below:-
A stock’s listing euphoria, therefore, doesn’t necessarily imply an equally stupendous run in due course. Similarly, it would be incorrect to assume that an average listing may not translate to high returns in future.
A glance at the reported numbers of such companies over the past six quarters underscores the fact that markets reward promising and/or consistent stocks in almost all cases, even if there are some minor/infrequent blips in certain quarters. Nevertheless, apparently, share prices are considerably influenced by speculative transactions and company/sectoral/economic developments, among other reasons, as well.
Unsurprisingly, some IPOs didn’t strike a chord with the investor community. Some of the reasons attributable to the lacklustre listing (followed by an equally uninspiring price performance) include an exceptionally high price band vis-à-vis the company’s financials or growth outlook, lack of popularity, and a business structure that didn’t quite seem convincing enough.
IPOs, undoubtedly, provide a good entry point for institutional and retail investors alike. In a bull environment, more often than not, though most issues end up doing reasonably well as far as listing gains are concerned, it is pertinent to note that the premium pricing (a commonly observed trend) in a public offer may not be necessarily sustainable. For example, the likes of ICICI Prudential Life Insurance and L&T Infotech were listed at a discount to the issue price and haven’t been in the crème de la crème category of performers (in terms of price returns post-listing) either.
Therefore, individuals should wisely align their investment decisions with a stock’s prospects of a multiple re-rating (by virtue of better earnings visibility) in the medium to long-term before choosing to block their funds. Getting carried away by listing gains is an imprudent move, too. This is because most IPOs are priced after comprehensively discounting growth expectations in the near future. Having said that, there is no dearth of chances of accumulation in the post-listing phase, even in case of fundamentally strong companies.
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