A Bad year for IPOs

Even as late as June this year, investors in initial public offers (IPOs) continued to be better off than those who dabbled in the secondary market. Smaller IPOs continued to deliver good listing gains, even while selecting stocks in the secondary market became a much more difficult proposition.

But the vicious downswing in the market over the past three months has well and truly blown the froth off the IPO market. Not just the new ones, but even ones that were listed over the past year have all plunged below their offer price. Seventy-six of the 83 IPOs that listed between March 2007 and March 2008 are now available below their offer price.

Here are the lessons from those 83 IPOs (recent ones were excluded as the time window would be insufficient to draw conclusions).

Of the total 96 initial public offers in the period, 13 were withdrawn. The remaining 83 IPOs were considered for this analysis. For performance study, price movement from the listing date to October 15 was considered.
Should have sold on first day

One common lesson for investors from IPOs in this period is that, irrespective of the quality of the issuer, you would have fared better had you booked gains on the listing day. Holding these stocks in expectation of better gains in the secondary market would have resulted in sharp erosion in value. Fifty-two of the 83 stocks that debuted in the period closed in the green on listing day. Of these, 22 listed at a price which clocked a 50 per cent gain over their issue price.

However, of the 83 stocks only one (Allied Digital) currently trades at a price higher than its listing price; all others have fallen from their Day One prices. On the other hand, of those that had a bad listing, only three — Koutons Retail, Page Industries and Bang Overseas — made gains in the days following listing. The wait was not worth it for the others.

If stocks gave away much of the gains made on listing, a good number of them also plunged below their issue prices. As many as 76 IPO stocks are trading below their offer price now. When it comes to the extent of losses, the quality of the business didn’t matter much — IPOs from quality businesses, such as BGR Energy, Transformers and Rectifiers and Edelweiss Capital, were among the worst performers — their prices beaten down by over 70 per cent.

The extent of decline in stock prices shows that the pricing for IPOs in a bull market tends to factor in premium valuations and probably assume best scenarios for these businesses, resulting in high downside risk.

Better bet than listed peers

Would investors have been better off picking stocks from the secondary market as compared to the IPO? The answer is still ‘no’. Though IPOs have put up a dismal performance, they have still fared marginally better than peers from the same sector in the secondary market. A study of 30 prominent IPOs in this period suggests that newly listed stocks fared better than their listed peers since their offer date.

Of the 30 IPOs, 18 recorded a lower percentage fall than a listed peer from the same sector, from the time of their offer. In fact, select stocks such as Maytas Infra (up 22 per cent) and Religare Enterprises (up 76 per cent) actually delivered hefty gains from their offer price, even as listed companies from the sector fell sharply. Nagarjuna Construction (down 79 per cent) and Geojit Financial Services (down 47 per cent), loosely comparable to the above, declined sharply over the same period.

But do note that it is only the listing gains that have ensured better performance from the debutants.

Religare Enterprises, a financial services firm focussed on broking services, was sold at Rs 185 in its IPO. But on the day of listing, the stock closed at Rs 525.30, a straight 183 per cent gain. In one year from the month it listed (October 2007), the stock lost nearly 38 per cent, but the gains made on listing are still holding the stock above its issue price. This further supports the logic for selling stocks on the day of listing.

Maytas Infra, Power Grid Corporation, Everonn Systems, Allied Digital Services and ICRA are the other stocks that held on to gains over their offer price, thanks to strong listing performance.

So, if you were to make a decision on the day of the offer, the IPO would have been the better buy. But if you were to look for secondary market options, an older peer would have been a better buy than a newly listed stock.
The subscription figures delude

As in the preceding year, overwhelming response to an IPO was no guarantee of the stock’s performance. Of the IPOs in this period, Everonn Systems was in the top place, over-subscribed 145.5 times, followed by Future Capital (131.79 times), Mundra Port and SEZ (115.32 times) and BGR Energy (115.13 times).

However, from the date of listing to now (October 15), Everonn Systems has fallen by 55 per cent, Future Capital by 77 per cent, Mundra Port and SEZ by 60 per cent and BGR Energy by 81 per cent. The best performing IPO — Allied Digital Services — was subscribed by a little over 59 times and Indian Bank, another good performer, by 32 times.
No sector orientation

Last year’s IPO returns numbers showed a distinct trend, with those from financial services, software and infrastructure faring relatively well. But this year’s performance tally shows no sector-specific trend in the returns. In every sector an equal number of IPOs performed better than their listed peers as those that did worse.

The stocks that topped the listing gains list were Everonn Systems, Vishal Retail, Religare Enterprises, Nitin Fire and Mundra Port, hailing from diverse sectors. But the common thread that ran through them all was the time of their debut.

All these stocks were listed between June and December last year, a period when the Sensex rallied from 14K to 20K levels. And of all the IPOs, only seven are still holding above their issue price — Religare Enterprises, Maytas Infra, Koutons Retail, Everonn Systems, Time Technoplast, ICRA and Page Industries. Again, all of them listed between March and December 2007.

The performance of the IPOs was thus a function of market conditions at the time of the offer, more than company-specific or sector-specific factors. Of the 17 stocks that listed in the choppy markets between January and March this year only Bang Overseas is still in the green (up 54 per cent from the issue price). However, at current levels a few of them are really attractive ‘buys’ — Maytas Infra, Consolidated Construction Consortium, Mundra SEZ, Onmobile Global and MindTree Consultancy. Given the change in the earnings outlook, the ones in the financial sector are better avoided as concerns over the financial turmoil in broader markets persist.

Clearly this has been a bad year for greenhorns, whether they were investors or companies seeking to make a debut in the market!