IPOs: The Great Gamble

The rush for IPOs, albeit not new to the Indian stock market, has gained momentum in the last few years. In 2023, Tata Technologies set a new record by garnering 73.58 lakh IPO applications. In fact, not only are IPOs attracting heavy retail participation, majority of them are even getting listed at a heavy premium to their issue price.

In FY21,70% of 30 main-board IPOs got listed at a premium, followed by 72% (out of 54 IPOs) in FY22 and 67% (out of 37 IPOs) in FY23. And, as if in a race to surpass records, 78% of 54 main-board IPOs were listed at a premium in the first nine months of FY24.

Dwindling Tribe Of Value Investors?

While the market is always keen to celebrate such moments of investor euphoria, directed towards debutant companies, the accomplishments of these IPOs seldom become cause celebre, post their debut.

FY22, often proclaimed as the 'Year of IPOs' for the Indian market, may as well be dubbed as a case in point for premature celebration of underachievers. Out of the 54 IPOs of FY22, 39 were listed at a premium. On January 15, 2024, within a span of 22 to 34 months, 22 of the 39 IPOs were priced below their listing price and 17 below their issue price. In FY21, out of 21 premium listed IPOs, six were priced below their listing price and two were priced even lower than their issue price. In FY23, out of 25 premium listed IPOs, six were priced below their listing price and four even lower than their issue price.

The much celebrated FSN E-Commerce Venture, aka Nykaa, listed on November 10, 2021 at 78% premium with an adjusted price of ₹334. After its IPO, Nykaa stock was split in a 1:6 ratio. The stock is trading at ₹179 (January 15), a 46% decline from its listing price and 4% lower than its offer price of ₹188.

Another example is Chemcon Speciality Chemicals, which listed at a premium of 115%, at ₹731, on October 1, 2020. On January 15, 2024, the stock was priced at ₹285, 61% lower than its listing price, and a 16% decline from its issue price.

In total, during April 2020 (FY21) to January 15, 2024, 175 companies hit the IPO market, out of which 126 were listed at a premium, while 41 were listed below their offer price and eight stocks either at a premium or loss.

Does it mean that a large portion of the IPO market favours only those who can enter early and exit quickly before lock-in expiries start affecting share prices? Or does it indicate the absence of the long-term value investor?

Issue Price Bands

The first question that comes to mind about main-board IPOs that have hit the market in the last four years is about price discovery that appears to be off-key. When 70% of IPOs list at a premium in just one year, the phenomenon may be attributed to euphoria. However, when majority of IPOs consistently list at a premium, year after year, it does not seem to be a chance phenomenon, but a trend where investment bankers seem to be evaluating an issue at a price lower than what the market is willing to pay.

IPOs getting listed at more than 50% of their issue price are now becoming a norm, as 48% of premium listed IPOs in FY21, 36% in FY22, 8% in FY23, and 24%, so far, in FY24, were listed at more than 50% of their issue price. This begs the question whether the issue price bands of such IPOs were kept lower than market expectations to rope in retail investors who would keep absorbing the stock-dump that gets unlocked three months and six months later. Or did investment bankers miss something in their analysis?

In fact, 14% of premium listed IPOs in FY21 got listed at more than 100% above their issue price, while in FY22, such IPOs were 10% of the same cohort. In FY23 there were no such IPOs and in FY24, so far, only Tata Technologies have been listed at 140% premium. So, how can the price discovery of even a few IPOs be so off-key?

One may never know the real reason for such price discovery unless the Securities and Exchange Board of India digs deeper into the phenomenon. But it would be interesting to take a look at the following facts: Of the 175 IPOs launched during FY21 to January 15, 2024, 31 stocks (18%) are currently priced below their issue price, 16 of which happen to be the ones that got listed at a premium.

Dichotomy In Market Sentiment

While the market itself is buoyant and even IPOs are making the most out of this rally, investors seem to be ignoring large-cap legacy companies.

A list of Nifty50 laggards till January 15, 2024 contains names that are market leaders in their sectors. HDFC Bank is the biggest among private sector banks that has given a negative return of 4.6% in FY24. Similarly, HUL, India’s leading FMCG player, gave a meagre 1.1% return during the same period, while chemical sector major United Phosphorus Ltd. yielded a negative return of 24.5%.

The performance of these stocks vis-a-vis IPOs indicates that majority of retail investors are likely to have misunderstood the stock market to be a gambling den. Even during a bear market, investors tend to ignore large companies and focus on new entrants.

India's largest software services firm Tata Consultancy Services (TCS) has given a return of 20% in FY24, while another Tata Group company, Tata Technologies, which belongs to the same sector as TCS, listed at a 140% premium in November 2023, and is still trading 135% above its issue price (as on January 15, 2024).

The dichotomy is not just limited to companies belonging to the same group, it extends to sectors as well. For instance, Infosys has yielded a 16% return, at a time when IPOs of technology companies are listing at a huge premium. Ideaforge Technology listed at 94% premium, Netweb Technologies at 89%, and Tata Technologies at 140% in the current fiscal.

The current trend is of investors betting heavily on new players. But the trend seems to be hurting not just established players, but investors as well. In FY22, FSN E-commerce Ventures, aka Nykaa, listed at ₹334, a 78% premium to its issue price of ₹188 and by January 15, 2024, the stock had tanked even 4% lower (₹179) than its issue price. In FY21, Indigo Paints was listed at ₹2,607, a 75% premium to its offer price of ₹1,490, and as per January 15 closing price, the stock was trading at ₹1,507, 41% below its listing price and just 1% above its issue price.

All these point to the need to educate investors on value investing so that both participating companies and investors can focus on building long-term wealth from the stock market.

Undervalued IPOs

Although the majority of IPOs have been getting listed at a premium, there are outliers giving high returns despite getting listed below the issue price.

In FY21, out of 30 IPOs, nine were listed below their issue price. But these companies staged a phenomenal comeback and now eight of them have surpassed the issue price. For example, Angel One listed at ₹275, or 10% below its issue price of ₹306, on October 5, 2020. But according to the January 15 closing price of ₹3,875, the stock has gained 1,166% above its issue price, the largest gainer in the IPO category in the last three years. Likewise, Indian Railway Finance Corp., Equitas Small Finance Bank, Craftsman Automation and Kalyan Jewellers India, which listed below their issue price in FY21, have more than doubled.

In FY22, 15 out of 54 IPOs were listed below their issue price, of which six have been able to surpass their issue price as of January 15, 2024. Amongst them, only Metro Brands and Macrotech Developers have gained more than 100% over their issue price. Metro issued shares at ₹500, which traded at ₹1,257 on January 15, a 151% gain. Similarly, Macrotech Developers gained 454% over the adjusted issue price of ₹243.

In FY23, nine out of 37 IPOs were listed below their issue price, of which six surpassed their listing and issue prices.

Overall, between FY21 and FY23, out of the IPOs listed at a premium, 33% are now priced below their listing price, but out of the IPOs that were listed at a discount to the issue price, 60% are now priced above their issue price.

It seems that erring on the conservative side would bring in more benefits than being generous with IPO valuation.