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Nearly 50% of new listings fall below issue price; wait for earnings, say experts

The bull market helped many IPOs command high valuations but experts say that these companies would need to post strong earnings to meet investor expectations.

April 27, 2021 / 11:58 AM IST
IPO | Representative image.

IPO | Representative image.

The euphoria in the primary market, which helped companies raise more than Rs 17,000 crore this year, has fizzled out, with almost half of the recently listed shares trading below their issue price.

The second wave of the pandemic and the sharp fall in benchmark indices have dampened the sentiment in the primary market. The Nifty50 index has fallen about 6 percent from the high of 15,431 in February though it is still up about 4 percent this year.

Eight of the 17 recently listed IPOs have given negative returns, while seven of them have seen a double-digit growth. For computation, we have chosen companies with an issue size of over Rs 100 crore.

Companies trading below their issue price are: Anupam Rasayan, Easy Trip Planners, Home First Finance, Craftsman Automation, Suryoday Small Finance, IRFC and Kalyan Jewellers, data from AceEquity showed.

Experts blame high valuations, rise in COVID-19 cases leading to restriction, muted sentiment on D-Street and profit booking as some key reasons of selloff in some of the IPOs that listed in 2021. Earnings momentum can help some of these companies to put them back on buyers’ radar.

“Various IPOs have come at a very high valuation, considering the bull market and a blue-sky scenario valuation. Since the markets were not supportive, post Jan most IPOs didn't give that stellar response as they were in 2020,” Ashish Chaturmohta, Head of Technical and Derivatives, Sanctum Wealth Management told Moneycontrol.

“Further the P/E multiples to the earnings of a few IPO companies would match up, only if we consider a strong earnings momentum for a company, leaving no room for further upside in the stock price,” he said.

Chaturmohta said these stocks would be re-rated only upon earnings momentum. However, good companies having low debt, high ROE/ROCE, etc can be accumulated at dips.

Mohit Nigam, Head, PMS & advisory, Hem Securities, said he would like to wait for a quarter to get more conviction about their results and numbers.

“On the jewellery and travel front, currently we are not looking to add any positions due to a direct negative impact on these sectors and we might want to wait for some ease in the current atmosphere before plunging into that space,” he said.

IPO 2021 - trading 2604_001

The year 2020 saw stellar listings and many IPOs more than doubled in value. Not all IPOs are long-term bets and should not be bought just for listing gains. Investors should do their own research before they put money in IPOs.

“ ‘Subscribing for listing gains only’ has been the overall call for 50 percent of IPOs in FY21 since their fundamentals didn’t seem strong enough to avert the challenges of the pandemic,” Nirali Shah, Head of Equity Research, Samco Securities told Moneycontrol.

“Some of the IPOs were listed at exorbitant valuations which weren't justified, thus leading to a fall in prices. Investors are advised to take informed decisions on IPOs keeping their risk and liquidity needs in mind and avoid issues that are weaker from a fundamental perspective. Quality issues with favourable valuations can be added on dips,” he said.

Even if the company has good fundamentals, it may not necessarily garner a lot of interest or see a successful listing. The product, nature of business, product growth cycle as well as longevity are some of the factors to consider before tapping into an IPO, say experts.

Companies which have given double-digit returns since listing include MTAR Technologies, Indigo Paints, Nazara Technologies, Laxmi Organic, Barbeque Nation, Stone Kraft as well as Railtel Corporation.

IPOs need to be looked at from a different perspective as compared to investments in the secondary market.

“An investor should evaluate what’s special about the company and whether it makes a good fit in their portfolio. One must understand the business model of the company and evaluate as to what moat does the company enjoys,” Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services, told Moneycontrol.

“Is it a leader in its space or has it created a niche for itself in a crowded space or is it a first of its kind listing. For example, Nazara Technologies —a pure gaming company and the first of its kind to get listed in India. Indigo Paints saw a good response despite being in the paints industry as it has created a different market for itself by being present in decorative paints,” he said.

Jani said companies operating in already crowded space are not getting a lot of traction unless they have a specific moat. For example, Home First Finance and Suryoday SFB got a poor response.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

Kshitij Anand
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Apr 27, 2021 11:58 am