Markets

Are large IPOs destined to fail?

K. S. Badri Narayanan | | | Updated on: Nov 19, 2021
IPO Initial Public Offering finance business concept on green blackboard

IPO Initial Public Offering finance business concept on green blackboard | Photo Credit: golibtolibov

 

It appears size does matter when it comes to investment in initial public offerings. Companies that raised in excess of ₹10,000 crore amid much fanfare through initial public offerings have left a larger hole in the pockets of investors.

Of the 5 companies — One97 Communications (Paytm), Coal India, Reliance Power, General Insurance of Corporation of India and SBI Life Insurance — only Coal India made listing gains. However, IPO investors who have held on to Coal India shares — the price which has plummeted — are in a sorry state of affairs.

The SBI Life stock has generated positive returns for its investors despite making a poor debut at the stock exchanges.

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Reliance Power

The biggest disaster, of course, was Reliance Power. The IPO of the Anil Ambani company had generated bids worth over ₹7 lakh crore and the issue was subscribed by more than a record 72 times in 2008. The company had fixed the issue price at ₹450 a share for non-retail investors and ₹430 for retail investors. But those who were happy on receiving the IPO allotment were in for a rude shock as the stock had a terrible start.

RPower, which surged 19 per cent to ₹538 at open, saw the expectation of a dream debut vanish into thin air within four minutes of listing. Sadly, the initial four-minute high has been the only period that the stock managed to rule above the IPO price till date. There has been no respite for investors, as the stock falls to new lows each passing year to touch a low of ₹2.92 last year. The stock is currently hovering around ₹13.45.

So, should investors stay away from a large issue?

According to market experts, IPOs — whether big or small and old economy or new-age — will always fail if the valuation is very high. Investors are lured into all sorts of IPOs to make listing gains. Some may score handsome gains in a bull market but the valuation will not sustain unless the company makes smart progress, they added.

IPO at peak of cycle

Sunil Nyati, Managing Director, Swastika Investmart, said, “We have seen that most big IPOs didn’t create big wealth for the investors but we can’t generalise this trend because it mainly depends on the market cycle and valuations.”

Most promoters want to cash out the bull market and they come out with expensive valuations in hopes that they will get a good response amid a frenzy in the market, he said, adding, “Anecdotally, it coincides with the peak of the business cycle. Therefore, future growth fails to justify valuations and results in pain. I would suggets that investors consider valuations and future growth prospectus, and not be carried away by market frenzy before investing in IPOs.”

Secondary market

V Nagappan, a Chennai-based market expert, said an IPO by itself does not mean that something is available cheaper.

“The secondary market is always the best place to decide the price equilibrium. The primary market is skewed and is a place where there is only one or two sellers and too many buyers result in illogical price discovery. It is high time they allow open market bidding of these stocks in the secondary market and complete the entire process in T+2 settlement through the stock exchange mechanism,” the market veteran added.

Published on November 19, 2021

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