Why did some of the recent IPOs gave poor listing gains? Is the IPO craze over?

Short Answer

IPOs have been extremely popular lately as a result of increased retail participation, ongoing bull run, and massive listing gain opportunities. However, the Indian stock markets went through a minor correction which resulted in a muted performance of some IPOs. The market negativity coupled with the lofty valuations of some of the IPOs led to poor listing gains, but the craze might not be over.

Detailed Answer

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.

ipo correction.jpg

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.

Tagged With: initial public offeringlisting gainsdemat accountindian stock marketsecondary market
Categories: IPO Basics
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Related FAQs

How to find good companies as there are many publicly listed companies in the Indian stock market?

To find good companies out of the thousand companies listen on the Indian stock exchange, you can filter stocks on the basis of certain parameters such as Market cap, Debt to Equity, Dividend payouts, Revenue and Profits growth, etc. You can easily use an online stock screener to find out these stocks.

Why did the Paytm IPO did not perform well after listing?

One97 Communications, the parent company of Paytm came up with the largest IPO in Indian history but failed to perform well. Firstly the IPO was too big for the retail investors to digest. Then the valuations were extremely high which led to the HNIs and Institutions avoiding the issue. All together the overhype in social media led to massive losses for the retail investors as the stock fell almost 40% in two trading sessions.

What is an IPO or Initial Public Offering?

IPO or Initial Public Offering is the process through which a private company goes public by offering its shares to the public for the first time.

IPOs seem the modern money multiplying investment, Should you invest?

Good quality IPOs are great options for investors when considering investing in an IPO. However, IPOs should not be taken as money multiplier instruments and invested in. Multiple IPOs have performed badly due to extremely high valuations and poor financials. Hence, it is important to evaluate the financials of the company before investing in them.

Can I open 2 demat accounts with different stock brokers?

You can open more than one demat account as long as you open them with separate depository participants. It is completely legal to own multiple demat accounts but you cannot have more than one account with a stockbroker.

Is IPO investing good for new investors?

IPOs can be a good option for beginners as they provide an opportunity to get the shares of good companies at an attractive price. Though IPOs can provide good listing gains and quick profits, good companies can help you to create massive wealth in the long term.

Can I open 2 demat accounts with the same bank account?

Absolutely, you can open two or more demat accounts with one single bank account. You can, later on, add other bank accounts to your demat account as per your requirements.

Is opening a demat account free in India?

Yes opening a Demat account in India might be free with some brokers but not all. Apart from the opening charges, a Demat account is not completely free. You will have to pay an Annual Maintenance charge or Demat fee, every year.

Can we open demat and trading account without Aadhaar card in India?

Yes, you can open a trading and Demat account without an Aadhaar card but it's not possible to do that in the online method. To open your account without an Aadhaar card, you will have to visit the broker's branch and complete the process there.

Can we sell IPO shares immediately?

In an Initial Public Offering (IPO) a company sells its shares to investors in order to raise money. As a retail investor, you can apply for an IPO from the primary market in order to get the shares offered by the company. Once the shares get listed on the secondary market, you can sell your shares provided you have received an allotment in the primary issue.