As a market rally draws a flood of IPOs again, investors are likely to get burnt again, given the inherent nature of IPOs.
Initial public offers (IPO) are back in vogue in the calendar year 2010 as the market has hit a 21-month high. However, investors are still nursing huge losses from the previous IPO boom of 2007. In that year, a total of 83 IPOs were listed on the National Stock Exchange (NSE). Of these 83 IPOs, only 29 IPOs, which is just 35% of the total, have left investors’ capital intact; 54 IPOs are still quoting below the issue price; and 21 IPOs are down by more than 60%.
Among the 83 IPOs in 2007, nine were from the real-estate sector while eight were from construction/infrastructure or software/IT services. Real estate was the hottest sector of 2007. Of the nine real-estate IPOs, eight have inflicted losses. Orbit Corporation has been the only IPO from the real-estate sector to emerge as an outperformer. There were six IPOs each from the engineering and financial services sectors.
Among the major gainers was Power Finance Corporation. This stock has gained 218% from its issue price till 12 January 2010. PFC was followed by Everonn Education—formerly known as Everonn Systems (200%), real-estate firm Orbit Corporation (188%), Redington (175%) and ICRA (159%).
A major underperformer among the 83 IPOs issued in 2007 is Dhanus Technologies. This stock has slumped 89% from its issue price, whereas two IPOs from the garment sector—Indus Fila and House of Pearl Fashions Limited—plunged 82% and 84%, respectively from their issue price. The IPO of Broadcast Initiatives from the media sector has declined 81% from its issue price.
Alpa Laboratories Limited (down 77%) and Decolight Ceramics Limited (down 78%) were other major losers. Abhishek Corporation and Vishal Retail too slumped 76% each from their issue price. Vishal Retail, which once peaked to Rs1,001 in 2008, is now trading at Rs65 after defaulting on loan repayments in 2009.
This pattern of IPO boom and subsequent underperformance of IPOs has been a cyclical phenomenon. The irrational IPO boom of 1995-96, after issue pricing was freed from the clutches of the Controller of Capital Issues, led to the phenomenon of vanishing companies. Many high-profile companies, such as HCL Technologies and TV18, are still quoting below their offer prices.
The recent market rally has rekindled investor interest in IPOs. IPOs are a means for promoters to raise money at the highest possible price from the investors, backed by investment banks and the support of institutional investors. That is usually a recipe for a stock’s severe underperformance, post-listing.
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