The recent rally in the stock market saw many companies coming up with their IPOs. While some did well, many gave flat to negative returns. This begs the question – how have the IPOs of the past fared over a longer period of time? But before we look at the data, let’s look at the Nifty performance.
If the past 3 years have to be broken into 1 year buckets, in the first bucket (Oct’20-Oct’21) Nifty gave 52% returns, but in the second (Oct’21-Oct’22) and third. bucket (Oct’22-Oct’23) the returns were subdued. In such an environment, where for 2/3 of the period the benchmark has given negligible returns, does an IPO investment generate alpha?
Source: Ace Equity, Equentis Research
Source: Ace Equity, Equentis Research
In the past 3 years, 143 mainboard IPOs have come up for listing. Of these, the majority of the companies are from sectors such as healthcare, chemicals, capital goods and finance. Also, the IPO subscription ratio was on the higher side with some IPOs being subscribed more than 100x. While the IPO frenzy may have died down in the recent past, investor interest hasn’t completely waned.
Of these 143 IPOs, 76% of them gave positive returns on the issue price. But with more than 60% of IPOs oversubscribed more than 10x, it is difficult to get subscriptions in the IPOs. Therefore, it is better to evaluate the performance of an IPO from the list price. From the list price, 38% of the IPOs gave negative returns and 44% underperformed Nifty. Also, only 12% of the IPOs were multi-baggers and gave a return of more than 100%.
Source: Ace Equity, Equentis Research
If the 6-month and 1-year returns of the IPOs from the list price are analyzed, more than half of the IPOs gave negative returns in a 6-month period and 37% of the IPOs gave negative returns in the 1- year period. Although this trend may seem discouraging, on a positive note 19% of the IPOs have doubled their listing price in a 1-year time frame. Also, 58% of IPOs outperformed Nifty in 1 year period.
Source: Ace Equity, Equentis Research
Source: Ace Equity, Equentis Research
Out of the companies that have been listed in the last year, 75% have given positive returns and 38% of them have given returns of more than 20%, which is a decent alpha as Nifty has given only 6% returns in the last 1 year.
Source: Ace Equity, Equentis Research
The companies which have given double digit returns or are multi-baggers range from various sectors like BFSI, auto, healthcare and consumer. 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 recession, 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 an IPO investment, factors such as valuations, market buoyancy and macroeconomics must be considered.
Jaspreet Singh Arora, CIO, Research and Ranking
Unlock a world of Perks! From insightful newsletters to real-time stock tracking, breaking news and a personalized news feed – it’s all here, just a click away! Login Now!
Catch all Business News, Market News, News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More or less
Published: 18 Dec 2023, 11:09 IST