IPOs: initial exuberance is no guarantee for healthy returns

While initial public offer market heated up in 2015 and saw record fund raising after a lull of five years, investors should not get swayed away and go with the herd mentality. This is because not all IPOs have turned out to be multi-baggers even if they were massively oversubscribed or listed at huge premium.

Of the 42 companies whose issues were subscribed by over 50 times and got listed since 2005, 27 companies have given negative returns in the range of 19-99 per cent (after adjusting corporate actions).

However, 15 have given positive returns of 37-1227 per cent with rating agency ICRA topping the chart.

“Extent of oversubscription is not an indicator for long term performance. It depends on the lack of investment opportunities and market sentiments, said UR Bhat, Managing Director, Dalton Capital Advisors.

31 of the 42 IPOs have come between 2005 and 2007 – one of the best bullish phase of Indian equity markets.

Also, it depends on what kind of investors - qualified institutional buyers, non-institutional investors and retail - subscribing into the issue, pointed out Daljeet Singh Kohli, head of research at India Nivesh Securities.

In short, it also depends on a particular investor’s appetite and secondary market conditions.

For example, in case of Alkem Laboratories and Dr LalPathLabs, QIB portion was subscribed by more than 50-60 times whereas retail got subscribed by 3-5 times. In case of ICRA,, the retail investor portion was equally strong at 54 times as compared with 54-91 times in case of QIBs, FIIs and non-institutional investors.

In 2007, Nifty gave a return of 55 per cent compared to 4 per cent fall in 2015 (till December 28).

Of the negative performers, four belong to financial services sector and 16 from sectors like construction, real estate, power generation, shipyard, mining and metals.

Out of 15 companies giving positive returns, five are from information technology sector, and three belong to financial services.

Sizzling debuts is also not a guarantee that the stock will turn out to be multibagger in the long term. For example, Tantia Constructions’ issue had got listed at a premium of 260 per cent in April 2006 but now its stock price is down 43 per cent compared to its issue price of Rs 50.

Similarly Bharti Shipyard got listed at a premium of 97 per cent premium to its issue price in December 2004 but its stock price is trading down 55 per cent compared to its issue price.

This is not only due to the financial crisis in 2008 but also company specific reasons.

Disappointing stock performance by heavy industries mentioned above is due to the financial crisis, wherein interest rates started rising and order inflows vanished.

Prior to the financial crisis or in the boom period, many companies had raised capital--either in terms of equity at premium valuation or huge debt due to low interest costs—to fuel robust business growth.