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IPOs- A performance review over the last seven years
Jan 5, 2015


Few days back, we wrote on how 2014 was a limp year from the perspective of IPOs. Unlike the rising activity in the secondary markets, the primary markets seemed to be largely untouched by the Modi frenzy. The year 2014 witnessed lowest amount of money raised in a decade! However, the lackluster trends in the primary market can largely be attributed to the time taken in IPO formalities. As the reform expectations bring retail investors back to the markets, a new wave of confidence has taken over the companies that are ready to raise money this year. As such, 2015 will be a different story for IPO market it seems.

As per an article in Firstpost, IPOs worth at least Rs 80 bn are lined up to flood the markets in 2015. Further with SEBI likely to notify new norms for e IPOs, the primary markets may witness a heightened activity.

However, before you bet your hard earned money on these, allow us to share some statistics with you. Taking a look at the long term trend, in the last seven years, 63% the total 178 IPOs issued are currently loss making. Six of these companies were suspended. It needs to be highlighted that all of these IPOs have been analyzed considering their prices in 2014, a year when the Sensex reached new life time highs. The performance could be worse if seen in any year prior to 2014. And it is not just the IPOs of small firms that have disappointed. Reliance Power and DLF Ltd were some of the biggest failures, both eroding over 70% of investors' capital since their IPOs hit the markets!

But have the retail investors learnt any lessons from the past? We don't think so.

Of the six IPOs in FY15 so far, most of which were in small and medium cap space, five were oversubscribed. With limited track record of financials or management performance and integrity, what is it that's driving the investors to these stocks? It is unlikely to be the attractive valuations. As aptly put by the investing legend Warren Buffett - "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

It is certainly greed playing the dominant factor, both for the issuers and the subscribers. And while it may serve the former as bullish sentiments rule, the long term retail investors are likely to get the short end of the stick.

We hope the lessons learnt from past experience will not be lost as a slew of IPOs hits the markets. As everyone around seems to be greedy, it is time for retail investors to exercise caution. While this does not mean that you should avoid IPOs lock, stock and barrel; make sure you do not end up paying higher valuations for a company that is yet to establish its worth.

Do you think retail investors are likely to be the most vulnerable participants in the upcoming IPO boom?

Data Source:Firstpost

This Chart Of The Day was published in The 5 Minute WrapUp - Beware of the upcoming IPO boom!

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