One very interesting inference that can be drawn is that last year those companies which were listed with a higher price than the IPO price, are all generating positive returns (comparing the offer price) as on 16 July,2021.
The nationwide lockdown starting from 25 March 2020 was imposed by the government of India to curb the spread of novel coronavirus. During this Covid-19 induced restrictions, the economy contracted in the financial year 2020-21. This resulted in a higher unemployment rate in both the formal and informal sectors. However interestingly during the same period, there was an unprecedented surge in trading and investment in the stock market. Both benchmark Sensex and Nifty have clocked in their high during the pandemic period rising from the low that they hit in March 2020. The new entrants are retail investors with their participation booming amid the pandemic situation. According to the data from the Securities and Exchange Board of India (SEBI), the new DEMAT accounts rose to an all-time high of 10.7 million between April 2020 and January 2021. The recent data from the National stock exchange (NSE) shows that retail participation in the stock market’s equity division constituents 45% of trading turnover.
What was the reason behind such an influx of these new retail investors (a major chunk is the gen Z and millennials) in the stock market? Of course, the influence of Warren Buffet, Rakesh Jhunjhunwala, or the movies like The Wolf of Wall Street and Harshad Mehta series acted as a catalyst, but the major source of ignition arose from income uncertainty due to a significant number of job losses. Many opened their DEMAT account during the pandemic, reminding us of the Warren Buffet quote that “If your salary is your only source of income, you are one step away from poverty”. The ease of opening the DEMAT accounts also boosted the process. Discount brokerage firms like Zerodha, Upstox, etc. helped the emerging investors to open the account just in few hours. And the investment awareness campaigns also promoted the account opening with different sharebrokers.
Another reason for such a high influx is the increase in liquidity in the market because of Foreign Institutional Investors (FIIs). After withdrawing about $6.4 billion in the March 2020 quarter, FIIs re-entered the Indian equity markets in the June and September 2020 quarters. The value of FII investments in Indian equities reached $ 450 billion at the end of the third quarter of 2020. At this period, the overall spending on consumables was low and the additional inflow of foreign currency increased the liquidity in the market. So, for the middle-income group, investment in stocks was an attractive option.
It is no exaggeration to say that, most of the investment decisions were influenced by the recent rally in the stock market and not driven by the fundamentals of the companies. The surge in the stock price of Bombay Oxygen Investments Ltd (BOM) was one of the prime examples of herding behaviour in the stock market. The price of BOM skyrocketed when there was high demand for medical oxygen across the country, but the fun fact was, BOM was just a chemical company, not a producer of oxygen.
Companies aiming to raise finance through IPO took advantage of the increase in the number of account holders in the stock market. This is because the number of active investors increases the probability of bidding which would further improve the probability of oversubscription, and eventually, the listing will occur at the highest price. And from the new investors’ point of view, IPO is a fast-profit-making option & it requires much less research for bidding. Only the general market sentiment is enough to anticipate listing gains. The phenomenal participation of retail investors made almost every IPOs getting oversubscribed from the retail category. During the pandemic period, a large number of Indian companies raised ₹ 20,350 crores and ₹ 31,265 crores in the financial year 2020 and 2021 respectively through Initial Public Offerings (IPO).
The trending craze of IPOs was very peculiar last year (the same trend is following this year though). From the general preconceived notion, we can justify our rationale that, those companies with very good financial records and future growth opportunities, should get very impressive responses from the primary market. But if we eyeball the recent IPO data, the retail subscription was almost 68 times for a loss-making company like Burger King or BBQ Nations (with 13 times oversubscription), and the same was only about 3.6 times for Indian Railway Finance Corporation (IRFC), which produces profit year-on-year, and is expected to improve the profitability further. Interestingly, even after 1.5 years, IRFC shares have not picked up in the secondary market whereas the RailTel IPO despite being a government-backed company, performed very well both in the primary and the secondary market. It is very difficult to formulate any strategy for the companies launching an IPO, as decrypting the mindset of the retail investors is almost impossible. But each IPO was the talk of the town every time. Maybe because the new investors are very tech-savvy and they always kept an eye on the review and financial analysis of these IPOs through different mediums. Hence, the overall response from the primary market was very beneficial for the issuing companies.
But what about the gain of the investors (the retail investors, as they are the prime focus of the discussion)? Well, it was a win-win situation for both the investors and the companies. Talking about the listing gains, 29 out of 40 companies (excluding the recent IPOs that are not listed yet) gave an average of 42% returns. And all of those 11 companies that couldn’t generate listing gains, are already giving returns as of today (15th July 2021). This means every listing of last year gave at least some returns (the minimum profit figure is 29%, SBI Cards). The 1-year return from the IPOs will be difficult to measure, as only one company came up with IPO in the first 6 months of last year. So, if we consider all of those last year’s IPOs, the average return is 202%. But it is unfair to assume everyone got the allotment of all these IPOs. So, from the listing price, if we calculate the return, it is roughly 118%.
One very interesting inference that can be drawn is that last year those companies which were listed with a higher price than the IPO price, are all generating positive returns (comparing the offer price) as on 16 July,2021. So, from a value investing point of view, investors feel, these companies are a good bet for them in the long term.
However, there is a propensity that, retail investors who get the IPO allotment tend to square off the position on the listing day itself, with a moderate listing gain. With the spreading news of some supernatural listing gains of some companies, for example Indigo paints, which was listed with 109% return, or Happiest Minds Technologies, which was listed with 123% return, etc., potential investors get the motivation to enter the equity market. And at the same time, some active investors tend to bid furiously for the next IPO without proper analysis. The first outcome is good for the economy. But the second scenario is detrimental to investors’ mindset and leads to a gambling outlook towards the IPOs. So, the education on personal financing and the stock market, interpretation of the balance sheets of companies for fundamental analysis, understanding the due diligence of companies across sector, is something that the retail investors must know thoroughly.
Source: Business World