Bleeding IPO stocks tell the story of how Fed, Russia popped the bubble

IPO

Don’t judge a book by its cover and an initial public offering (UPO) by its valuation. Shares of more than half the companies that launched IPOs and listed in 2021 have plummeted to below the sale price, eroding billions of dollars in investor wealth. Companies, especially start-ups, received robust demand even at lofty valuations. Some pulled off bumper listings.

"A lot of recently listed IPOs have borne the brunt of heavy corrections. There have been a lot of factors at play here with the central banks going on tightening cycles, Russia-Ukraine crisis and of course the IPO valuations of many of these recently listed IPOs were also very rich to start with", said Aditya Kondawar, chief operating officer at JST Investments.

The US Federal Reserve is expected to hike policy rates seven times this year, making the dollar a more lucrative asset.

The expected tightening by the Fed, coupled with the Russia-Ukraine war, means the dollars that chased emerging market stocks are no longer doing so. The fall in valuations of Indian IPOs have clearly shown the froth that dollar liquidity created.

Aggressive valuations

Of the 63 companies that raised money through IPOs last year, stocks of 34, or 54%, have dropped below their issue price in the recent correction.  Most of the IPOs in negative territory are information technology-enabled new age businesses, whose valuations at the time of their IPOs looked stretched.

Companies in other sectors such as jewellery, retail, dairy, diagnostics, cement, health insurance and real estate that launched IPOs have also fallen largely due to their aggressive valuations that a rally in the midcap and smallcap stocks enabled at the time.

For instance, Star Health & Allied Insurance Co Ltd, Glenmark Life Sciences Ltd and Krsnaa Diagnostics Ltd closed flat on debut and now trade around 35% each below the IPO price.

Indigo Paints Ltd, which listed at a 109% premium, currently trades just 10% higher than its issue price. Both Zomato Ltd and Tega Industries Ltd debuted at over a 60% premium each, but now trade at just 2% higher than the IPO price.

FSN E Commerce Ventures Ltd that owns the brand Nykaa, and Go Fashion (India) Ltd debuted at an over 80% premium, but erased most of their gains and trade just 20% higher than issue price. Dodla Dairy Ltd gained 42% on its listing day and now trades just 3% higher than its issue price.

Wealth erosion

Companies that listed at a discount last year still trade below their issue price. One97 Communications Ltd, owner of Paytm, listed weaker on debut and now trades over 70% down from its issue price of Rs 2,150. Fino Payments Bank Ltd, SJS Enterprises Ltd, Nuvoco Vistas Corp., CarTrade Tech Ltd, Suryoday Small Finance Bank Ltd, Windlas Biotech Ltd, Kalyan Jewellers India Ltd, Shriram Properties Ltd and RateGain Travel Technologies Ltd listed at discount and still trade between 30-65% lower than theirIPO price.

Given the huge erosion in value, these companies faced flak from many retail investors, following which, in February, the Securities and Exchange Board of India (SEBI) released a discussion paper asking new-age technology firms to justify the pricing of shares in their IPOs to ensure transparency.

"The investors have slowly started to realize that not all of these stocks had sound fundamentals while many were in the cash-burning stage and profits are a distant story for them. This, coupled with the fact the interest rates have seemed to bottomed out, has led to selling of these stocks," said  Vinit Bolinjkar, head of research at Ventura Securities Ltd.

While the drop in valuations may make some of the companies look appealing, analysts warn that investors should not jump in and buy.

"Investors should not get excited and buy newly listed stocks that have fallen steeply from their recent highs. While bounces in them cannot be ruled out, one is not sure about how many more shares will come in for selling (from large investors who applied in the IPO, employees etc) on end of the lock-in period or otherwise,” said Deepak Jasani, head of retail research, HDFC Securities..

“Investors will do well to study some of these companies in detail and if they are  comfortable with the business model and expect the companies to turn profitable soon, only then they should start accumulating these in tranches and keep validating their conviction in the meanwhile based on emerging news/developments," he added.