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Home >Markets >Mark To Market >If you don’t get an IPO allotment, be wary of buying on listing day

The initial public offering (IPO) market is hot right now and, therefore, the possibility of listing gains is drawing investors by the hordes.

Given the huge demand, most investors don’t get an allotment in the initial share sale. In such a scenario, there is a temptation for those who missed the bus to buy shares when the shares list. Is this really a good strategy?

In the past three months, 11 out of the 12 companies that listed on exchanges are trading below the price discovered on the first day of trading.

Only two of these companies listed below the IPO issue price, which means investors who were allotted shares in the IPO have, by and large, done well. However, those riding on the euphoria and getting in on the listing day have done miserably.

IPO math
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IPO math

This is in stark contrast to the 10 IPOs in the preceding three months between mid-September and mid-December 2020. Only for one of those stocks, Chemcon Speciality, is the current price below the price discovered on the first day of trading. Evidently, IPOs during that time were priced more reasonably.

Riding on the success of the IPOs during that period, issuers are perhaps pricing at relatively high levels, say analysts. “Most of the current IPOs are overpriced. Besides, traders are quickly rotating money into new issues and they don’t want to buy and hold. Another problem has been that many anchor investors are exiting after a month of lock-in, which is causing more selling pressure," said Nitin Rao, founder of alphaideas.in, an investment blog.

“I believe March IPOs are going to end in mayhem for investors. Most issues are extremely overvalued," said Shyam Sekhar, co-founder of iThought, an investment advisory services firm.

Topping the list of underperformers post listing is Mrs Bectors Food. While it more than doubled on listing, the stock has declined as much as 41% since then.

IPO allottees, of course, are still in the money. It’s those who tried to ride the wave by getting in on the listing day that are in trouble.

“Only in a few cases are companies able to report results that justify valuations. For instance, stocks such as Route Mobile and Gland Pharma have reported better-than-expected earnings post listing," said Rao.

Technology services firm Happiest Minds, too, posted a jump in margins and earnings, because of which its shares have more than trebled since listing. Route Mobile tops the list of outperformers, jumping 86% on listing day and then gaining another 143% post listing. Those who bought on listing day have ended up with more gains, assuming they are still holding the stock, compared with IPO allottees who sold their shares on listing.

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