What Is the IPO Euphoria Signaling Us About the Markets?

Dec 2, 2019

Ankit Shah, Research analyst

Yet another IPO that received a euphoric response from investors!

When the CSB Bank IPO closed for subscription last Wednesday, the issue was subscribed nearly 87 times.

At my premium newsletter Insider, where I cherry-pick the best investing and trading ideas, I recommended my readers to subscribe to the IPO. I sincerely hope that those of you who applied receive allotment and enjoy bumper listing gains.

The IPO of Ujjivan Small Finance Bank just opened for subscription today. I'm analyzing it for my readers and guiding them what to do.

Coming back to the phenomenal demand for the IPO of CSB Bank...

Prior to the opening of the IPO, the bank had finalized allotment of 94.54 lakh shares to anchor investors at a price of Rs 195 per share.

This meant that of the maximum IPO size of Rs 409.68 crore, 45% or Rs 184.35 crore worth of shares were already allotted before the IPO opened for subscription.

So, the actual bidding that happened was for about 1.16 crore shares, which at the upper end of the price band would be worth Rs 225.32 crore.

Of the nearly 1.16 crores offered for subscription through the IPO, investors bid for a whopping 100.44 crore shares!

At the upper price of Rs 195 per share, the bids would translate into a massive amount worth Rs 19,587 crore.

Let me say it again - Rs 19,587 crore worth of bids for shares worth just Rs 225 crore. It shows that there's a lot of money waiting to pour into the markets if the opportunities are attractive.

The huge demand for the IPO was seen across categories - the QIB portion was subscribed 62.18 times, the non-institutional investors portion was subscribed a stellar 164.68 times, and the retail individual investor portion was subscribed 44.53 times. It is worth recalling that the retail portion was subscribed over 5 times on the very first day.

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What's Behind the Crazy IPO Rush?

I understand that the bank has a turnaround story...that it has some legacy strengths in its core markets...that the entry of the billionaire Canadian investor Prem Watsa's FIHM as the new promoter adds a lot of crediblity...that it is undergoing some big, strategic shifts in a bid to emerge as a full-service new age private sector bank with big growth plans.

Sure, all of this makes for a compelling story. Even more compelling when the Sensex is hitting another milestone of 41,000 and the market participants are hungry for quick gains.

But there's one more reason for the euphoric response to the IPO of CSB Bank.

The following table will offer you a hint...

2019 Has Been a Year of Stellar IPO Gains

Company Name Issue Size (Rs cr) No. of Times Sub-scribed Listed On Invest-ment (Min. Lot) Listing Day Gain/ (Loss) (%) Listing Day Profit (Rs) Gains Since Listing (%) Gains Since Listing (Rs)
Xelpmoc Design and Tech Ltd* 23 3.25 2-Apr-19 13,200 -10.9% -1,440 -4.3% -570
Chalet Hotels Ltd 1,641 1.57 2-Jul-19 14,840 3.7% 551 26.8% 3,975
MSTC Ltd* 212 1.46 29-Mar-19 10,800 -4.8% -522 25.2% 2,723
Rail Vikas Nigam Ltd* 482 1.83 4-Nov-19 14,820 0.3% 39 26.1% 3,861
Metropolis Healthcare Ltd 1,204 5.84 15-Apr-19 14,960 9.0% 1,352 58.4% 8,730
Polycab India Ltd 1,346 51.96 16-Apr-19 14,526 21.7% 3,159 72.2% 10,492
Neogen Chemical Ltd 132 41.18 5-Aug-19 13,975 22.6% 3,156 73.3% 10,251
IndiaMART InterMESH Ltd 476 36.21 4-Jul-19 14,595 33.9% 4,943 121.0% 17,656
Affle India 459 86.49 8-Aug-19 14,900 17.5% 2,602 105.0% 15,640
Spandana Sphoorty Financial 1,202 1.05 19-Aug-19 14,552 -0.9% -129 43.7% 6,358
Sterling and Wilson Solar 3,145 0.85 20-Aug-19 14,820 -7.0% -1,038 -57.1% -8,468
IRCTC 645 111.95 14-Oct-19 12,800 127.7% 16,344 180.2% 23,062
Vishwaraj Sugar Industries 60 1.12 15-Oct-19 14,400 0.6% 84 17.5% 2,520
CSB Bank 410 86.93 4-Dec-19 14,625 ?? ?? ?? ??
Data Source: BSE, NSE
*Gains as on 27 November 2019

You can see that this has not been a year of IPO rush. There have been only 14 IPO so far, including the recent one of CSB Bank. The fifteenth IPO of Ujjivan Small Finance Bank just opened today.

Many IPOs boasted of solid fundamentals. Also, given that the markets had phases of bearishness and indecisiveness this year with fears of a severe economic slowdown, many IPOs were also priced fairly.

If you pay attention to the second column, most IPOs have not been too large. The median IPO size has been close to Rs 500 crore.

If the IPO size of a quality company is relatively small, it tends to create a big demand-supply gap. On one hand, the supply of shares is limited. On the other hand, the demand from various categories tends to be huge.

In the ensuing euphoric scramble to grab a small pie of a quality company, the share price zooms higher post listing.

This is exactly what has happened.

9 of the 13 companies that listed this year posted gains on their listing day. Just four IPOs failed on listing. But the losses, in terms of percentage, were restricted to single digits.

So, the risk-reward equation was clearly in favour of IPO investors. The rewards were huge, whereas the risks were minimal.

In fact, the only large IPO was that of Sterling and Wilson Solar. It not only fared poorly in terms of subscription, but also had a poor debut at the stock exchanges.

If you look at the two columns to the extreme right, you can see that all IPOs except Sterling and Wilson Solar are trading above their issue prices and have made money for investors who held on to their shares post-listing.

Let's say you applied for the minimum lot for every IPO in 2019. And for the sake of our hypothesis, let's also assume you received the minimum allotment in each of the IPOs.

How much would you have to invest? What would have been your return if you sold the shares on the listing day? And would have been your returns had you held on to the shares so far?

Take a look at this table...

If You Invested in Each of the 13 IPOs of 2019...

Total Investment 181,703
Listing Day Gains (Rs) 29,101
Listing Day Gains (%) 16%
Gains Since Listing (Rs) 96,228
Gains Since Listing (%) 53%

It's clear from the table that IPOs have been a no-brainer this year. They offered attractive listing day gains.

And if you held them post-listing, the gains were more than 3x of the listing day gains.

Now, what happens when more and more people start noticing such quick money-making schemes?

Everyone wants it!

So, I'm not surprised with the euphoria that the recent IPOs of IRCTC and CSB Bank have seen. (More on it on the Chart of the Day).

Most of the investors don't seem to care that the bank is coming out of a challenging phase...that it incurred losses for three consecutive years from FY17 to FY19...and while it is much better positioned to chalk out a sustainable growth path, the banking and finance industry is intensely competitive and going through a rough patch. The path forward will be full of challenges and pitfalls.

My sense is that many investors are not concerned about the bank's future. They're just looking for a quick profit.

I don't see anything wrong in that. In fact, I recommended my Insider subscribers to apply for the IPO from a purely behavioural basis.

My IPO mantra is simple: Join the euphoria, make a quick buck, and get out before the party ends. 😊

Chart of the Day

2019 has seen some of the most mindbogglingly profitable IPOs.

The top six IPOs of the year have given high double-digit and triple-digit returns so far - IRCTC (180%), IndiaMART InterMESH (121%), Affle India (105%), Neogen Chemicals (73%) and Polycab India (72%).

Now, besides spotting winning opportunities early on, there's one more reason I actively track IPOs - they offer great insights into the mood of the market.

So, I picked the six most successful IPOs of the year and checked the retail investor enthusiasm for them.

Obviously, all these IPOs were oversubscribed across investor categories. But the level of retail investor enthusiasm differed widely, depending on the overall market sentiments.

Are Retail Investors Back in the IPO Game?

Clearly, IRCTC witnessed the highest number of bids for the retail category. Factoring in the discount of Rs 10 per share for the retail category, the total bids were worth a whopping Rs 3,242 crore. Over five times the entire IPO size!

Polycab India and the recent IPO of CSB Bank also received a strong thumbs-up from retail investors.

Does this hint that retail investors are coming back to the markets? Could we witness of flurry of IPOs in the coming months?

I'm going to keep a close watch and pick all the profitable IPOs for my readers at Insider.

Warm regards,

Ankit Shah
Ankit Shah
Editor, Equitymaster Insider
Equitymaster Agora Research Private Limited (Research Analyst)

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