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Initial public offerings: Not all on the list is worth a tick

With just a third of the offerings in past 12 years outperforming the market, retail investors must be more vigilant while jumping on the IPO bandwagon.

Written by Sandeep Singh |
November 13, 2015 12:58:16 am
The disparity in the performance of the IPOs calls for greater scrutiny by retail investors before they invest in public offerings. The disparity in the performance of the IPOs calls for greater scrutiny by retail investors before they invest in public offerings.

In a matter of two weeks, two large IPOs met with contrasting fates at the stock exchanges.

While Coffee Day Enterprises witnessed a cold listing at the bourses and is trading 18 per cent below its issue price, the public offering of InterGlobe Aviation, that got listed on Wednesday, brought cheer to investors as it rose 13.6 per cent on the first day of its listing to close at Rs 868 against the issue price of Rs 765 per share. In the first two days InterGlobe stocks have risen by over 20 per cent.

These are still early days and it will take a few more for the price to settle down, but the disparity in the performance of the IPOs calls for greater scrutiny by retail investors before they invest in public offerings. Even if the company is making profits, the pricing of the issue is crucial.


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Interestingly, while both issues generated similar interest from retail investors, the difference was created by foreign institutional investors. While the Rs 1,150-crore Coffee Day IPO saw its retail portion subscribed 0.9 times, its qualified institutional buyers portion got subscribed 4.4 times. On the other hand, while the retail portion of the Rs 3,018-crore IPO of InterGlobe Aviation, that runs Indigo Airlines, was subscribed 0.92 times, the QIB portion received subscription of 17.8 times with overall subscription of 6.15 times.

As a result, InterGlobe Aviation emerged as the most actively traded stock at BSE on the day of its listing and it witnessed 1,12,386 trades with a turnover of Rs 445.86 crore during the day and saw its share price rise above the issue price. On the same day, the shares of SpiceJet and Jet Airways fell by 5.1 per cent and 4.3 per cent, respectively.


While Coffee Day continues to disappoint its investors who are still waiting to see the scrip rise above the issue price, the investors of InterGlobe Aviation have a reason to cheer as they are in the money. Market experts, however, feel that the upside for both the stocks is limited in the near term as both the issues were priced at a premium and not much was left by the promoters and the merchant bankers for the investors.

Commuters move past an advertisement of IndiGo Airlines in Ahmedabad. (Source: Reuters) Commuters move past an advertisement of IndiGo Airlines in Ahmedabad. (Source: Reuters)

“The individual must be clear whether he is getting into an IPO for listing gains or as a long term investor. An IPO does not mean assured return but is as risky as any stock. However, if the IPO has witnessed a huge QIB demand and the market is buoyant on the day of listing then there may be listing gains,” said Prithvi Haldea, founder chairman, Prime Database.

The trendInvestment into initial public offering was a good way to invest in companies before the global financial crisis as they generated superior returns for investors at the time of listing. However, that has not been the case over the last few years.

Out of the 17 public issues that have hit the market this calendar year, 7 are trading below their issue price and one is trading close to its issue price. The overall trend in the last five years has not been very encouraging except for the two years when the markets rose sharply.

A large number of companies that came out with their public offering between 2010 and 2012 are still trading below their issue price and have not made money for their investors.

According to an IIFL note, over the past 12 years, there have been 575 IPOs, which raised more than $40 billion. Of these, just over 500 IPOs have a price history of more than a year. Of those 500 IPOs, a majority (54 per cent) have delivered negative returns after one year of trading. This means stocks of these companies were trading below issue price a year post listing.

Of the remaining IPOs that did deliver positive returns a year after listing, a further 20 per cent underperformed the benchmark Sensex. Thus, only about a third of the IPOs have historically outperformed the market and were (at least on ex-post basis) ‘investible’, the IIFL note said.

Even, Sebi chairman UK Sinha had in the past pulled up merchant bankers for extracting the maximum possible price from the investors and not leaving anything for them in the issue.

He had also pointed out that between 2010 and 2012 almost two-third of IPOs were trading below the issue price (at which public investors were sold shares in the IPO). Following this Sebi started asking a lot of question on pricing and put restrictions and obligations on merchant bankers. It started asking questions on their track record and told the bankers to preserve the due diligence on the issuer company for a period of three years.

Haldea, however, pointed that once the company gets listed then there are factors other than the pricing that drive the stock just like any other listed stock in the secondary market and so the comparison should not be with the issue price.

Where should you invest ?

The performance of public issues that have hit the market this year is not very encouraging and therefore calls for investors to be more vigilant while investing in IPOs. While a lot of the companies that launched their IPOs are now available at a price much lower than their issue price, experts say that investors should not look for immediate gains now and along with reasonable pricing of the issue, they should also look for good stories and good promoters and invest with a relatively longer term horizon to benefit.

“Investing into good stories and with credible promoters will make sure that investors don’t lose their capital and will gain from the investment,” said the head of an investment banking firm.

The response from institutional investors is also very critical and investors should closely follow their interest in the issue before venturing. As can be seen from the QIB interest in the two companies that got listed this month — Coffee Day Enterprises and InterGope Aviation — the one that witnessed very strong QIB demand got listed at a premium as against the other one where the QIB interest was relatively muted.

A primary market expert said that retail investors should wait for the first two days of the issue period to see how they are investing and follow them accordingly. He, however, said that that is not the only thing to check.

“Another fact that retail investors should see is whether the private equity funds that invested into those companies earlier are fully or partially exiting the company at the time of the IPO. If they are exiting fully then it means that they do not see much upside in the company and therefore retail investors can simply give the issue a pass,” he added.

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