75% IPOs show positive returns in past year: Does IPO investing generate alpha?

The recent rally in the stock market saw many companies coming up with their IPOs. While some have done well, many have given flat to negative returns. This begs the question - how have the IPOs of the past fared over a longer term? But before we take a look at the data, let us look at the Nifty performance.

If the past 3 years are to be broken into 1-year buckets, in the first bucket (Oct’20-Oct’21) Nifty had given 52% returns, but in the second (Oct’21-Oct’22) and third bucket (Oct’22-Oct’23) the returns have been subdued. In such an environment where for 2/3 of the period the benchmark has given negligible returns does IPO investing generate alpha?

Source: Ace Equity, Equentis Research

Source: Ace Equity, Equentis Research

In the past 3 years, 143 mainboard IPOs have come for listing. Out of these, the majority of the companies are from sectors such as healthcare, chemicals, capital goods and finance. Also, the IPO subscription ratio has been on the higher side with some IPOs getting subscribed more than 100x. While the IPO frenzy might have died down in the recent past, investor interest has not waned completely.

Out of these 143 IPOs, 76% of them have given positive returns from the issue price. But with more than 60% of IPOs getting subscribed more than 10x, it is difficult to get subscriptions in the IPOs. Hence it is better to gauge IPO’s performance from the listing price. From the listing price, 38% of the IPOs have given negative returns and 44% have underperformed Nifty. Also, only 12% of the IPOs have been multi-baggers and given returns of more than 100%.

Source: Ace Equity, Equentis Research

If the 6-month and 1-year performance of the IPOs from the listing price is analysed, more than half of the IPOs have given negative returns in a 6-month period and 37% of the IPOs have given negative returns in the 1-year period. While this trend may seem daunting, on a positive 19% of the IPOs have doubled from their listing price in a 1-year time frame. Also, 58% of IPOs have outperformed Nifty in a 1-year period.

Source: Ace Equity, Equentis Research

Source: Ace Equity, Equentis Research

Of the companies that have been listed in the last one year, 75% have given positive returns and 38% of them have given returns of more than 20% which is decent alpha as Nifty has given only 6% returns in the last 1 year.

Source: Ace Equity, Equentis Research

The companies that have given double-digit returns or are multi-baggers, range from various sectors such as BFSI, autos, healthcare, and consumption. While the sector might be different one thread common among all is that - the companies have India-focused businesses. In a challenging environment where many large economies are struggling with inflation and de-growth, India's robust economic environment, stable policies, and improving infrastructure have propelled these businesses.

With many companies filing their DHRPs with SEBI, one can expect a decent flow of IPOs in the market. While the past data suggests a reasonable probability of generating alpha through IPO investing, factors such as valuations, market buoyancy and macroeconomics have to be considered.

Jaspreet Singh Arora, CIO, Research & Ranking