The Hindu Business Line : Flipping your stock is a risky game

How IPOs fared on listing was influenced more by prevailing market conditions than by the stock’s sector or business. Companies with moderate prospects piggybacked on bullish sentiment to record big listing gains, though it proved to be fleeting for some.

Kumar Shankar Roy

Many first-time equity investors enter the world of stocks through the IPO route. With more than 101 initial public offers hitting the capital market in the last year, it has been a steep learning curve for a majority of small investors.

Now with the market reaching new highs on the back of a fresh dose of inflows, the IPO story is sure to be back in centre-stage again. Business Line studied the size and profile of issuers, trends in subscription, and the listing and post-listing gains for 101 IPOs over the past year to evaluate what has changed for the IPO investor. Here are a few key takeaways from this analysis:

During this period, the odds of a retail investor securing allotment in an IPO improved.

With retail subscriptions to IPOs dwindling amidst robust institutional appetite for these offers, the small investors’ chances of getting allotment, even to highly fancied IPOs, have improved.

Market conditions, rather than the fundamentals of the sector or business on offer, have played a key role in the performance of IPOs on listing and the six months after. Be it response to an IPO, listing gains or six-month price performance — even fundamentally good businesses struggled in choppy or bearish market conditions. On the other hand, companies with poor credentials turned in a good show under bullish conditions.

Stocks listed through the IPO route managed to shake off bearish sentiment towards a specific sector. For instance, IT offerings notched up stellar listing gains even as their listed peers were battered by adverse sentiment caused by an appreciating rupee.

Better shot at allotment

In these 12 months, the average IPO was subscribed by about 22 times. The subscription in the non-institutional category was 32 times, while QIBs (which includes foreign investors) pitched in with 28 times.

Retail response was relatively modest, with average subscription at 11.6 times. These numbers indicate that retail investors had a much better chance of securing allotment in recent times.

This might be important considering that once the shares debut for trading, they usually become dearer to invest in.

Consider the case of Advanta India. Retail investors subscribed to just 26 per cent of their allocated portion in the IPO. The stock returned 23 per cent in its initial six-month period.

While this does not mean all under-subscribed issues are potential winners, it does show that retail investors can take cues from the QIB subscriptions to secure allotment in the potentially good offers.

Market and listing

How IPOs fared on listing was influenced more by prevailing market conditions than by the stock’s sector or business.

Companies with not so attractive prospects piggybacked on bullish investor sentiment to generate huge listing gains. SEL Manufacturing (59 per cent), Roman Tarmat (83 per cent) and Bhagwati Banquets and Hotels (27 per cent) are a few examples.

However, gains on listing proved fleeting for quite a few of the debutants.

Of the 93 IPOs that had a one-month price history after listing, only 33 registered further price gains from their first day’s close, one month after listing.

Standout examples include Atlanta (304 per cent), Development Credit Bank (72 per cent), Ess Dee Aluminium (31 per cent), Pyramid Saimira Theatre (167 per cent), Mindtree Consulting (38 per cent), Orbit Corporation (68 per cent), Gremach Infrastructure Equipments and Projects (64 per cent) and Everonn Systems India (37 per cent).

Two-thirds shed their listing gains in the month that followed. In almost 60 IPOs, share prices actually dropped from the highs on the first day.

Stocks such as Celestial Labs (-30 per cent), Asahi Songwon Colors (-34 per cent), Abhishek Mills (-30 per cent), Pochiraju Industries (-49 per cent), Akruti Nirman (-34 per cent), Cambridge Technology Enterprises (-45 per cent), Nissan Copper (-57 per cent) and JHS Svendgaard Laboratories (-37 per cent) registered sharp reversals in the month after listing.

The revelation that only a third of the IPOs were able to hold on to listing gains, makes the practise of flipping a stock (selling on listing for quick gains), a very risky game for investors, as it is difficult to predict which ones will rise and which will fall.

Increasingly, a part of the investor fraternity appears to be looking at listing gains and thus, booking profits shortly after listing. For those who prefer to be insulated from the need to trade rapidly, it may be best to invest in IPOs only if convinced of a company’s long-term prospects.

No sector bias

The list of IPOs that offered the highest listing gains in this period does not show any bias towards specific sector themes.

Stocks from diverse sectors have delivered top listing gains with the average gains at 22.8 per cent for the 101 stocks covered. This is 4 percentage points higher than the opening listing price, suggesting that stocks have risen on their opening day.

However, paring your holdings in a newly listed stock on the first day after it has had a splendid debut does not appear to be a good idea, especially for companies with good credentials.

Some stocks that have had a great listing have sometimes gone on to double or treble in value if held for the next few months.

ICRA, Orbit Corporation, Global Broadcast Network and Atlanta have delivered over 200 per cent returns on their Day One prices, over the next six months.

On the other hand, we found that companies that had a bad listing have not been able to easily recover losses in the subsequent months.

Twenty-two newly listed stocks, which ended their first day on the bourses below their issue price, have remained below it at the start of their sixth month after their debut.

Examples include House of Pearl Fashions, Cairn India, XL Telecom and Energy, LT Overseas and Raj Television Network.

Smaller companies, such as Suryachakra Power Corporation, AMD Metplast, Global Vectra Helicorp, Pochiraju Industries, Richa Knits and Usher Agro have fallen below issue prices even after managing to retain listing premiums for the first few weeks.

IT delivers, textiles disappoint

Despite its fading sheen in the secondary market, the IT sector has had the second highest number (12) of IPOs the past year.

Surprisingly, initial public offers from companies such as Take Solutions, Zylog Systems, Omnitech Infosolutions and Everonn Systems delivered quite attractive returns to investors, even as their listed peers have been languishing.

Of course, the fact that each of these companies focussed on niche segments, such as supply chain solutions or education, has helped their stock price performance.

Stocks from another sector that has been crying hoarse over the appreciating rupee — textiles — have fared poorly on listing.

Except for SEL Manufacturing and Hanung Toys and Textiles, the other nine textiles/garments related companies have had poor listing performance.

Mudra Lifestyle, Indusfila and House of Pearl Fashions finished their first day with declines of 15-30 per cent.

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Revisiting the IPO scene — Do the new entrants still merit a close look?

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Flipping your stock is a risky game