Are initial public offerings guaranteed money-spinners?

KS Badri Narayanan | Updated on September 18, 2020 Published on September 18, 2020

The bubble, much-trumpeted RPower issue serve as a reminder to be judicious

Euphoria has gripped the primary issue market. Last week, a few listings post initial public offerings, including one in India, caught the attention of both market participants and regulators, thanks to the strong response they received and the stellar listings after that.

Shares of Snowflake Inc, an e cloud-based data warehouse firm, surged 112 per cent on its debut on Nasdaq on Wednesday. As against the issue price of $120, shares of Snowflake, which is being backed by Warren Buffett’s Berkshire Hathaway Inc, ended the Day 1 of listing at $253.93. The same day, JFrog, which is into the software business focussing on developers, surged 47 per cent.

Back home, Happiest Minds Technologies, gave a whopping return of 123 per cent on listing day. The ₹702-crore IPO of Happiest Minds, promoted by Ashok Soota, garnered massive response from all categories of investors as it was subscribed 151 times. Earlier, Rossari Biotech, whose shares got listed in July, jumped 79 per cent on debut.

According to the World Federation of Exchanges (WFE), a global industry association for exchanges and clearing houses, in June alone, companies raised over $31 billion through IPOs – one of the highest monthly mop-ups observed in recent years.

A flood of new issues

Thanks to the recent success, the IPO market is warming up for a slew of launches.

A host of companies including CAMS, UTI AMC, Angel Broking, Chemcon Speciality Chemicals, Kalyan Jewellers, NCDEX, Barbeque Nation, Burger King, Bajaj Energy and Lodha Developers are speeding up their plans. The public issue of CAMS, Angel Broking and Chemcon Speciality Chemicals is scheduled to hit the capital market next week.

In the US, Amestie Operations, Corsair Gaming, Goodrx Holding, Laird Superfood, Palantir Technologies and FG New America are tapping the market.

Even Reliance’s Jio and Walmart-backed Flipkart (for overseas listing) and insurance behemoth LIC (eyeing domestic market), will kickstart their IPO plans soon.

Robinhood investors

No doubt, stock markets have been witnessing the entry of a new herd of retail investors, famously called Robinhood investors. The WFE said there has been a marked increase in retail participation in some countries, in both securities and derivatives. SEBI chief, too, acknowledged the rise of new investors.

As interest rates remain low in the developed markets and falling elsewhere, retail investors are looking for opportunities to increase returns. IPOs are one such avenue, and with the listing day itself generating hefty return, most of them found an easy way of making quick money in the market.

Lessons of, RPower

Investors thinking of making easy money should remember the bubble that was preceded by a slew of fancy IPOs. Not wanting to miss out on a perceived opportunity, venture capitalists, institutions and retail investors had poured money in internet-based companies during 1997-1999 period. The tech-heavy Nasdaq index, which zoomed five-fold between 1995 and 2000, crashed from a peak of 5,048.62 to 1,139.90 by late 2002. It took 15 years for Nasdaq to regain the peak in 2015, but by the time most of those fancied companies had already vanished, leaving big a hole in the pockets of investors.

In India, investors in Reliance Power IPO, which came out in 2008, remain at the receiving end. Year after year, the stock of RPower has been testing new lows, and investors have reconciled to their fate.

This is not to say IPOs are bad. The bubble was probably an aberration and on domestic front RPower could be an exception. For every IPO that failed investors, there have been many IPOs that gave handsome returns. For instance, of the 16 companies that came out with IPO in 2019, 12, including Affle (India), IRCTC, IndiaMart and Metropolis gave good returns. But of the 25 in 2018, 15 tumbled. Among them are ICICI Securities, Hindustan Aeronautics and Bharat Dynamics.

Fundamentals, business prospects and valuations hold the key, they say. Even fundamentally sound companies may not leave anything on table for investors by pricing the issue based on stiff valuation.

So, it is advised that investors remain cautious during this frenzied time.

As SEBI chief Ajay Tyagi recently said, retail investors should take informed decision. The increased retail participation is a sign of investors placing their trust in corporates and companies should ensure the trust is not broken, he said.

Are corporates and retail investors listening?

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Published on September 18, 2020
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