As Moneylife has been pointing out, chasing Initial Public Offerings (IPOs) after they are listed is usually a losing proposition for investors

Initial public offerings (IPOs) seem profitable only for promoters, while investors who invested their money in the IPOs on the anticipation of handsome profit usually make losses. At least that is what the BSE IPO Index says.

The BSE IPO index was launched on 24 August 2009. On 4 March 2011, the index closed at 1804.92 down from 1947.54 on 24 August 2009, or 7%. However, in the same period, the BSE Sensex rose 26%. Except the IPO, Realty and Power indices, all other indices on the BSE performed well during the period. The Consumer Durables, Auto, IT, Healthcare and Bankex indices grew by 101%, 67%, 64%, 59% and 59% respectively in the same period (24 August 2009 to 4 March 2011).

The Bombay Stock Exchange (BSE) launched the BSE IPO index to track the value of a company’s listing subsequent to a successful completion of an IPO. The index currently has 66 companies. But this figure is continuously changing, depending on how many companies are listed, as an IPO company is kept on the index only for two years.

Most of the investors fall prey to marketing pitch of IPOs and it has also been observed that investors intend to invest their money in high-valued IPOs as they think high-valued IPOs are bound to give higher returns. The BSE IPO index shows there has been no growth in investors’ wealth.

Among the stocks in the BSE IPO Index, Aster Silicates was the worst performer, which plummeted 77% to Rs27.30 per share on 4 April 2011 from its issue price of Rs118. Commercial Engineers & Body Builders, Raj Oil Mills and DB Realty were the other worst performers falling by 66%, 72% and 76% from their issue price, respectively.

The top gainers of the index as on 4 April 2011 are Jubilant Foodworks (up 289%), C Mahendra Exports Ltd (up 124%), Mandhana Industries Ltd (up 90%), Talwalkars Better Value Fitness (up 78%) and United Bank Of India (up 65%) from their issue price.

Since 1 September 2009, 92 companies have raised money from the primary market. Out of 92 companies, 61 companies are trading below their issue price. It clearly shows that those investors who held their shares for a long period did not make money.

According to Moneylife’s study, ‘How to play the IPO game’  (a research and analysis of 107 companies that have listed in the past three years), investors should certainly avoid IPOs after listing. This study adds that investors’ tendency to buy IPO shares and hold for the long term leads to losses. The study says 60 out of 107 companies that have listed in the past three years are trading below their issue price. A 44% chance of making money on one’s investment is hardly encouraging.

 Out of the 92 stocks which have been listed after 1 September 2009, there are 29 stocks which are not forming part of the BSE IPO index. Among these (29 stocks), the worst performing stocks are Euro Multivision, Gyscoal Alloys, Sea TV Network, Tirupati Inks and Cantabil Retail India which fell 79%, 76%, 74%, 69% and 68% from their issue price.

The top gainers during the period are Fineotex Chemical, Thangamayil Jewellery, Midvalley Entertainment, Globus Spirits, and Power Grid which rose 207%, 113%, 79%, 49%, and 17% respectively from issue price.

The Moneylife study says an investor can only make money when he plays the flipping game that means subscribing and then flipping it on the first day. Our research showed that an astounding 95 stocks that hit the market in the past three years got listed above their issue price. This indicates that the investor has an 89% chance of adding value to his investment on the listing day itself.