Retail investors have made more than Rs2,600 crore in the primary equity market between April 2006 and now, which translates into a 34% return on their investment of Rs7,500 crore in the 100 initial public offerings (IPOs) that hit the capital market during this time.
In contrast, the Bombay Stock Exchange’s benchmark index, Sensex, has only risen 24.68% from 11,564.36 points on 3 April 2006 to 14,418.60 on 21 May 2007. Retail investors are normally allotted 30% of the public floats.
This gain made by the retail investors is interesting as a majority (52%) of all IPOs since April 2006 are now trading at a discount to their issue prices. Ever since the secondary markets corrected sharply last May, when Sensex fell by more than 30%, one out of every two IPO investments has ended in losses for investors. But, that doesn’t mean that the investors who spread their risks evenly have ended up with zero returns, with the losers offsetting the returns made by the gainers.
In fact, returns generated by the gainers have been substantially higher than the cumulative losses incurred in companies that have fallen from their issue price. Gains, led by companies such as Reliance Petroleum Ltd, Tech Mahindra Ltd, Idea Cellular Ltd and GMR Infrastructure Ltd, were about Rs3,100 crore. Losses, primarily on account of Lanco Infratech Ltd, Cairn India Ltd and Akruti Nirman Ltd, amounted to only Rs500 crore.
The finding of the Mint analysis of 100 public floats and their performance between April 2006 and 21 May 2007, is based on the assumption that retail investors bought their entire 30% quota of shares in each of the public issues.
Besides, for comparison purposes, it’s also assumed that these shareholders have held on to their shares.
This may not be how decisions actually work on the ground as some retail shareholders sell shares on the day of listing to book profit. Arun Kejriwal, director at brokerage KRIS Capital and a keen follower of IPOs, says that a large majority of retail investors buy IPOs in order to profit from listing gains. Still, the analysis of 100 public floats in the past year shows that large issues have performed much better compared with their smaller counterparts.
For instance, two out of every three IPOs that had an issue size of less than Rs100 crore ended in losses for investors. In issues of more than Rs100 crore, only one out of every three issues was loss-making.
Experts say that it’s the large issues that matter more to retail investors, since most of their funds are parked there. To be sure, more than 87% of retail investments in the primary market happened in issues which had a size of more than Rs100 crore, each.
Prithvi Haldea, a primary market expert and managing director of Prime Database, says, “Judging the performance of IPOs as on a particular date can be a tricky exercise. Judging their performance, say as on 21 May, speaks more of the state of the secondary markets as on that date rather than how IPOs have fared till that date.”
The true measure for judging IPOs would be to see if they have provided investors an exit at a premium since listing.
Jet Airways Ltd is a case in point. It listed at close to a 20% premium to its issue price, providing its IPO investors a good exit opportunity. But, for investors who chose to hold on to the shares instead, the losses now are as high as 35%. Haldea says, “This is a result of the downturn in the airline industry. How can one say that the IPO was bad or overpriced?”
If one applies this measure to the set of 100 stocks that got listed since April last year, only 10% have continuously traded at a discount to their issue price. The others have offered positive returns at some point or the other, with as many as 68 of them offering returns of more than 20%.
RETAIL GAIN FROM PRIMARY ISSUES (Graphic)