In IPO investments, selling on listing day gives the best returns
An analysis of 200 IPOs since 1999 shows 99 stocks had one-year returns that lagged listing day gains, 84 stocks dropped below the IPO share price band
Mumbai: It may have been prudent to sell most initial public offering (IPO) shares on the listing day rather than holding on to them for longer, a Mint analysis of the top 200 initial share sales by issue size since 1999 shows.
Data sourced from primary market tracker Prime Database shows 177 of the top 200 IPOs have completed at least a year since their listing. Of these, 99 stocks had one-year returns that lagged behind listing day gains. The year-end price of 84 stocks dropped below the IPO issue price.
To be sure, some of these may have listed at the very end of a bull run or an economic upcycle. Looking at it another way, the one-year returns of 95 stocks trailed those of the benchmark Sensex.
The numbers get worse when two-year and three-year returns are compared with the listing day pop (see chart). In other words, the frenzy and hype surrounding IPOs more often than not leads to good trading propositions but not investment ideas.
“The big question that investors need to consider is, ‘am I buying at a fair price or not?’” said Nilesh Shah, managing director of Kotak Mahindra Asset Management.
“In India, the mistake that retail as well as institutional investors commit is they start looking at grey market premiums and decide on their investment in the IPO,” added Shah.
The grey market is usually driven by HNIs (high net-worth individuals), who put in bids to subscribe to large chunks of an IPO, far in excess of the portion reserved for them. This pushes up the overall subscription levels for the issue and, in turn, attracts investors to buy shares in the grey market at a premium.
“That market has no scientific way of discovery. It could be rigged very easily as it is an unauthorized market,” Shah said.
Around 12 companies which have filed IPO or follow-on public offer (FPO) documents with the Securities and Exchange Board of India (Sebi) are awaiting approval. Prominent names include National Stock Exchange of India Ltd, which plans to raise around Rs10,000 crore, and SBI Life Insurance Co. Ltd and the New India Assurance Co. Ltd, which plan to raise around Rs7,000 crore each, showed Prime Database data.
Eleven other companies have filed their IPO/FPO documents and received Sebi’s approval. They collectively plan to raise Rs6,580 crore.
A few were of the opinion that selling on the listing day, was a good strategy in a bull market, and usually led to decent gains.
“People just hold on and have inertia or are greedy not to sell at a time when they can make profits. That is where they lose the opportunity to make good money,” said Prithvi Haldea, founder and chairman of Prime Database. “Then, if the prices go down, they complain of over-pricing.”
“IPOs should not be put on a pedestal and expected to perform well and forever,” he added.
The top IPO by issue size, Coal India Ltd, which raised nearly Rs15,200 crore in 2010, saw a listing day gain of 39.73%. Over one-year, two-year and three-year periods, it posted gains of 33%, 43% and 19.2% gains, respectively, from the issue price.
Over the three-year horizon, the best-performing stock was state-run Union Bank of India, which surged 688%. It was followed by Jubilant FoodWorks Ltd, which gained 683% over the first three years. State-run Canara Bank gained 553%.
Shares of Maruti Udyog Ltd (now known as Maruti Suzuki India Ltd), Bharti Tele-Ventures Ltd (now known as Bharti Airtel Ltd) and National Thermal Power Corp. Ltd (currently known as NTPC Ltd) rose 525%, 385% and 282%, respectively, in the first three years of their listing.
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