Bets on recent initial public offerings by companies have backfired for investors as the weakness in the stock market has eroded gains in most of the listings in the last one year. Shares of 35 of the 60 companies that have launched their IPOs since 2017 are currently trading below their IPO allotment price with over 20 of them losing more than 20 per cent, show data compiled from the stock exchanges.
The BSE IPO index, a gauge of newly-listed companies, has fallen 14 per cent during 2018 against a 2 per cent rise in the benchmark Sensex. Investors who put money into new exchange traded funds (ETFs) are, however, better off than the ones who chose to park their money in IPOs and stay invested.
CL Educate is the worst performer in the list with its shares falling 77 per cent from their IPO allotment price. Shares of S Chand, Bharat Road Network, ICICI Securities and Apollo Microsystems have all fallen over 50 per cent from their issue prices, data showed.
All the government-owned entities that launched their IPOs during the period barring Midhani and RITES are trading below their issue price. Shares of General Insurance Corporation(GIC Re) have fallen 65 per cent from their issue price, while Bharat Dynamics and Hindustan Aeronautics shares are trading 31 per cent and 26 per cent below their issue price, respectively.
Market observers say such a correction in the newly-listed companies was imminent on account of several factors including the premium valuations that these companies commanded during initial share sales and also due to the broader market weakness.
During 2017 and early 2018, Dalal Street witnessed a bull market where benchmark indices scaled record highs. In such a market, IPOs were in vogue as investors flocked these issuances. Making the most of the scenario, several companies offered shares at steep valuations.
“Most of the recent IPOs were done to provide exit to the existing investors such as private equity funds. These investors wanted to maximize their gains and since there was sufficient investor appetite, these IPOs managed to sail through despite being expensive,” said an investment banking head of a large firm.
The weakness in the mid-cap space has also impacted the newly-listed stocks as a bulk of these companies fall under the category.
“The stock performance of newly-listed companies is a function of the broader market trend,” said Ajay Saraf, executive director, ICICI Securities. “Many of these companies were from the mid-cap segment and they have not behaved any different from the other mid-cap companies.”
The excessive concentration of IPOs around the financial services sector has also not played well for the investors. The sector contributed to more than half of the IPO fundraising between 2016 and 2018. Non-banking financial companies (NBFCs) were in the forefront of this fund raising with companies such as Aavas Financiers and Credit Access Grameen launching their initial share sales. However, the ongoing crisis in the NBFC sector has adversely impacted these stocks.
“(Year) 2018 has not been so great in terms of performance of newly-listed companies but 2017 was a fairly good year and stocks did see valuations go up in the market before falling this year in line with the market correction. Broader market has to move up for these stocks to do well,” said Girish Nadkarni, managing director, Motilal Oswal Investment Banking.
However, the period also witnessed few multi-bagger IPOs that kept investors glued to the primary markets. For instance, shares of Avenue Supermarts have seen shares surging 365 per cent. Shares of Salsar Tech, Shankara Building Materials and Apex Frozen Foods have all doubled from their IPO prices.
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