Watch Out, Only 3 Out Of 10 IPOs Earn Above-Average Returns In Long Run Ramkrishna Kashelkar ET INTELLIGENCE GROUP
ICAN feel it coming, SEC or not, a whole new round of disastrous speculation, with all the familiar stages in order — blue chip boom, then a fad for secondary issues, then an over-thecounter play, then another garbage market in new issues, and finally the inevitable crash. I don’t know when it will come, but I can feel it coming, and damn it, I don’t know what to do about it.”
That was not Sebi chairman CB Bhave, but Bernard J Lasker, New York Stock Exchange chairman ruing about investor exploitation way back in 1970. In the past four decades, nothing much has changed in investor greed leading to entrepreneurs and bankers exploiting it, which triggered Mr Bhave’s bemoaning of IPO pricing last week.
At least a dozen companies sold shares in the past two weeks, to raise 3,100 crore to fund new projects and provide exit for private funds that are capitalising on the investor euphoria, making many times their investments. Corporates need to channel national savings into equity capital in an economy that aspires to grow at 10% emulating China, but as is usual there are possibilities of greed overtaking entrepreneurial ambitions. Career Point, a company that runs coaching classes for students, saw its IPO, priced at 31.6 times earnings, receive 47 times subscription. Water treatment company VA Tech Wabag had its issue bid 36 times after pricing shares at 27.8 times its earnings.
“In a bid to maximise returns for promoters they (investment bankers) are not looking at the interests of investors,” Mr Bhave lamented last week. “You need to introspect whether it is a healthy practice. If you keep investors disappointed day in and day out, the cause of investors will only be a lip service”
While Indian growth euphoria is strong with overseas funds pouring in a record $18 billion this year so far, there may be disappointments for investors along the way. Empirical evidence suggests that IPOs do tend to trade at a significant premium at the time of listing, only to fall later.
An ETIG analysis of 277 IPOs that got listed since January 2006 shows that nearly two-thirds posted listing gains. However, as time progressed the proportion of companies staying above their issue price declined rapidly. Three years since the listing, only 31% of the scrips could maintain their prices above their respective IPO prices. In other words, there is a 69% probability that a share will trade below its IPO offer price by the end of the third year after listing.
The study reveals that some of the biggest IPOs have been a drag on investor wealth. Those who subscribed to the Reliance Power public float in January 2008 has lost 42%. So is the case with the biggest real estate developer DLF whose shares are trading 30% lower and the scrip of Future Capital Holdings is down by two-thirds its IPO price.
But that does not mean that all IPOs have been eating up investors hard earned savings. While listing gains is a global phenomenon, the analysis showed that 21% IPOs gained more than 50% on listing day itself. In the subsequent months as more and more scrips fell below their offer price, the proportion of companies exceeding 50% gains grew. Within 10 months after listing, 28% of IPOs managed to command premium in excess of 50% over their issue price. About 18% of the IPOs doubled, while 9% tripled within 10 months. This analysis shows that only about three in every 10 IPOs can enable investors earn above average returns in the long run.
Just as the multi-baggers of the past — Infosys, TCS or ONGC — a few of the notable IPOs of late have more than doubled investor wealth since listing in 2010. This includes, Jubilant Foodworks, ARSS Infra, Aqua Logistics and Thangamayil Jewellery.
In fact, the market performance of IPOs in the long- and short-run is a well-researched area in capital markets literature, first studied by the US Securities Exchange Commission in 1963. Most of the studies across geographies and time periods conclude significant premium at listing and subsequent weakness indicating it is a global phenomenon. But researchers are still working to find an answer as to why IPOs tend to jump on their debut. Are they chasing a mirage?
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