Driven by liquidity and bullish sentiment, scores of investors are looking at IPOs as an opportunity to make quick listing gains. So much so that they are opening demat accounts for their parents and relatives to maximise the ‘opportunity’ considering retail investors have an investment cap of Rs 2 lakh for each IPO.
A couple of big questions emerge:
- Are IPOs really generating value for investors?
- Does it make sense to go with the flow?
Here’s what the numbers say.
Value or illusion
Let’s take a look at Paytm to begin with. Touted as the biggest IPO in Indian history, the Rs 18,300 crore Paytm IPO witnessed a disastrous debut as it listed at a 27.25% discount. Despite being the largest digital payments aggregator and a household name, there are many reasons why Paytm did not live up to the hype.
To begin with, the IPO was subscribed 1.89 times, while stocks of Nykaa and Policybazaar listed around the same time garnered far more investor interest – oversubscribed 81.78 and 16.59 times, respectively. Stock allotment is proportionate to the subscription levels and a lower subscription ratio means almost everyone who applied got at least some shares. This demonstrates the pure play of demand-supply economics. When the stock went up on the bourse, there were more sellers than buyers. Hence, those looking purely for listing gains were either forced to liquidate at a loss or rejig their strategy.
At a fundamental level, Paytm is years away from seeing any discernible profits. The issue price was valued at 49 times its FY ’21 revenues. Changing dynamics of the fintech sector, coupled with an unclear road to profitability, would make Paytm more of a speculative than prudent choice for long-term investors.
On the other spectrum, let’s take a look at stocks like Paras Defense & Space Technologies, Sigachi Industries and Latent View Analytics that more than doubled and tripled on listing day. These stocks were phenomenally oversubscribed, due to which the actual allotment was minuscule. The effective gain (if realised) in rupee terms was between Rs 2,500 and Rs 6,700 on these stocks for blocking capital of Rs 2 lakh each for about three weeks till allotment. This implies that if retail investors apply for IPOs blindly then they are likely to have limited gains in absolute terms at the time of listing for the companies which have substantial interest whereas lose money for the companies where less interest is there. In either case, there is not much benefit to the overall portfolio.
A timeline of performance
Many investors believe that IPOs allow them to board a growth stock on the ground floor before it becomes too expensive. While they are more than happy to employ a buy-and-hold strategy and pay a premium for expected future growth, not all IPOs prove to be long-term winners.
Of the 53 IPOs till November 2021 this year, only about half of them did well on listing day with subsequent returns being flat or negative. Sigachi Industries is one such example that opened at Rs 604 (270% listing gain) and is currently trading at about Rs 410.
From the same period, 24 stocks including Paytm, CarTrade, Windlas BioTech, Aditya Birla AMC, Glenmark Lifesciences, among others, are trading anywhere between 35%-15% below their offer price. These statistics ring true across timelines. Over the last five years, close to 600 entities have gone public. Of these, almost 40% stocks are trading below their listing price even as of date.
The right approach
Investing in IPOs to make listing gains is not a sin; however, it should not be the sole driver of your investment purpose. Any stock you choose to add to your portfolio should be in sync with your financial goals and risk appetite.
Do your due diligence regarding the issue. Unlisted businesses do not have historical records in the public domain for you to assess and the RHP document is the first such document that becomes available at the time of going for the IPO. Gather as much information as you can about the business – from RHP, promoters, key business drivers, growth prospects, to existing stake of private investors and venture capital, competitive landscape and valuations of similar companies with respect to size and sector, etc.
Additionally, have a look at the subscription levels of institutional buyers. A high QIB subscription is usually an indicator of strong quality and price. If the stock is not overly subscribed at the retail level, you need not buy multiple lots up to the full quota of Rs 2 lakh.
If you do miss on a subscription, don’t be in a hurry to get it immediately on listing. Let the initial euphoria settle to see investor interest and evaluate how the company settles in new waters. Keep in mind always the long-term prospects of the business.
(The author is Chief Investment Officer, Scripbox.)
