Initial Public Offering (IPO) of big companies are often indicators of market strength. Big IPOs have been notorious for coming near market tops and money is raised from gullible investors at ridiculous valuations. In fact, these are a big giveaway of market strength.
Given this, HDFC Asset Management Co’s IPO which was subscribed 83.06 times the shares on offer was not costly. It was issued at a marginal premium to Reliance Nippon Asset Management Co, the other asset manager listed on the bourses. It is only after the opening day pop of 65 percent, HDFC AMC’s valuation widened over its rival.
Still, HDFC AMC’s IPO and the size of oversubscription highlights the market appetite for a good paper. It also shows that there is a lack of quality issues. This appetite for IPOs has been exploited by many companies.
Indian exchanges have seen 90 IPOs in the first half of 2018 raising $3.9 billion, the highest activity in terms of the number of deals anywhere in the world, according to EY India IPO Readiness Survey Report. Indian public issues market accounted for 16 percent of the total issues globally. However, in terms of proceeds, the market share was only 5 percent, highlighting the increasing number of smaller sized issues.
In fact, only 19 companies of the 90 that tapped the market raised more than Rs 100 crore. The bigger story, however, is the post-listing performance.
The 19 companies that raised at least Rs 100 crore in 2018 have seen their cumulative market capitalisation rise 15 percent. This performance might look impressive given the 8.59 percent return for the Nifty. But the devil is in the detail and in this case it is an ugly one.
If we remove Bandhan Bank’s 83 percent increase (about Rs 3,743 crore), then the remaining 18 issues’ market capitalisation has increased only 0.1 percent. If HDFC AMC is also removed then the cumulative marketcap of the remaining 17 firms in this set has shrunk 8.8 percent. Looking at it another way, only 10 of the 19 companies which raised at least Rs 100 crore have given positive returns.
The pattern seen in 2018 is not an isolated one and is a repeat of the stocks that debuted in 2017. A handful of stocks such as Avenue Supermarts (the owner of D-Mart retail chain), AU Small Finance Bank, HDFC Standard Life Insurance Co and Shankara Building Products with their superior returns managed to salvage the year for companies tapping the market in 2017. The overall market cap gain of 5.6 percent for these firms would have been impossible but for triple-digit returns by Avenue Supermarts and Shankara Building Products.
Given the handful of stocks that are responsible for an overall gain in the new issue market, it is little wonder that legendary investor Warren Buffett always advises to stay away from investing in IPOs. Buffett has been quoted as saying "You don't have to really worry about what's really going on in IPOs. People win lotteries every day."
A look at the performance of IPOs in Indian market ones again proves him right. An odd HDFC AMC is the lottery he speaks about. Coincidentally, given the oversubscription, HDFC AMC shares were allotted through a lottery system to retail investors.