What is an IPO?

An IPO or an Initial Public Offering is a process through which a private company (unlisted) becomes a publicly-traded company, by getting itself listed on the stock exchanges. Through this process, the company also raises funds from retail and institutional investors to fund their expansion and other needs. IPOs have been in the limelight recently due to multiple factors. Let’s look at some of the reasons behind the massive flow of IPOs this year.

The reason behind rising popularity in IPOs.

The year 2021 was an extremely bullish year for equity investors as well as for IPO investors. A total of 63 companies went public in 2021 raising a total of Rs 118,704 crore or $15.4 billion. Most of the companies that got listed were great businesses with determining management and team.

Let’s try to decipher the reason behind the stellar rise of IPOs and their popularity among retail investors.

1. Increase stock market participants in 2020-2021

The recent pandemic taught investors the importance of personal finance and investing. Because of these reasons, a record number of investors entered the Indian stock markets. An average of 26.7 lakh new demat accounts were opened per month which is the highest ever. These new participants brought surplus liquidity alongside which caused an increase in inflows into equities as well as other asset classes. A substantial part of the total liquidity found a way in the IPO markets that led to extraordinary subscriptions and demand for IPOs.

2. Ongoing bull-run and the tech boom

Post the 2019 correction, the Indian equity markets have witnessed a massive run-up to the tune of more than 100% in the last year. Much of the rally was contributed by the technology and IT-related companies. These companies have increased their customer base as people adopted the work-from-home culture. The Nifty IT index has returned an enormous 59% YTD (year to date) this year. This is one of the key reasons why tech IPOs have been massively oversubscribed recently.

3. Lofty listing gains

Another reason why investors are enticed to IPOs was the lofty listing gains they provided. 14 IPOs delivered more than 100% listing gains in 2021. Sigachi (270%), Paras Defence (185%), Latent View (148%), Burger King (130%), Happiest Minds (123%), were among the top 5 performing IPOs this year.

Looking at the stellar listing gains, more investors piled up on IPOs which led to massive demand in the secondary market.

The reason behind the poor performance of some of the recent IPOs.

Although the complete picture looks exceedingly attractive, there’s a twist to it. Towards the ending of 2021, multiple IPOs failed to cope up with the sky-high expectations of investors and ended up in the red on the date of listing. Paytm (One Communications) which was the biggest IPO in India, lost almost 40% of its value in a couple of days after listing. Furthermore, three more issues are listed at a discount from their issue price, despite a strong subscription.

Let’s look at the reasons behind the poor performance of some of the IPOs.

1. Extreme high valuations

Many of the recent IPOs tried to extract more and got listed at exorbitant valuations. Loss-making companies like Paytm, Zomato, who do not intend to be profitable in the coming 3-5 years demanded extremely high valuations. Such IPOs resulted in a quick sell-off as investors exited the stock on the listing day.

Here is a chart of companies that have fallen by more than 40% from their recent highs and also more than 40% from their listing price.

2. Negative market condition at the time of listing

The overall market sentiments and the broader market trend play a critical role when it comes to listing gains. In the month of October & November, the Indian indices witnessed a correction as the Nifty fell nearly 11% from its recent peak. This fall induced panic among investors who in return started selling even more. With all the negativity in the market, IPO stocks took a hit. Highly oversubscribed IPO like Metro Brands Limited was listed at a discount of (-9.3%), followed by Shriram Properties (-28%), RateGain technologies (-10.9%), and Star health Insurance Company which got listed 12.4% lower than its issue price.

What's next?

Looking at both sides of the equation, you must be wondering what's next! Is the IPO bull craze over?

The short answer is No. The primary reason, why some of the recent IPOs did not perform well was due to the negative market conditions. General corrections are common in stock markets, and nobody can predict them. As a result of the negative market sentiment, multiple IPOs listed lower than the estimated price.

However, the correction has been arrested by the bulls, and the Indian indices have stabilized again. Many of the quality shares have already started recovering and are higher than their listing price. Furthermore, there are numerous good IPOs lined up in 2022 and they are expected to provide good returns if everything remains the same.

Hence, IPOs still might still be one of the safest ways to enter the stock market for beginners. Though it carries certain risks, you should analyze the fundamentals and valuations of an IPO carefully before applying for it. This will ensure, you are not stuck in an IPO which lists at a discount on the date of listing.