Many high-profile initial public offerings (IPOs) that made waves in 2021 are facing rough weather — even as the Sensex at the Bombay Stock Exchange closed at an all-time high of 62,272 on Thursday, a number of these listings, including Paytm and Zomato, continued to struggle, leading to an erosion of investors’ capital.
With inflation numbers expected to gradually taper off, and with equity markets likely to benefit from the increase in FPI and domestic investor flows, experts advise investors to stick to good companies that are already listed on the stock exchanges instead of chasing IPOs that aim to take advantage of a rise in the secondary markets.
How have investors lost?
Investors who put money in a number of high-profile IPOs that came during the bull run of 2021 have suffered significant capital erosion. While the Sensex, which recently regained the 62,000 level, has risen over 21 per cent over the last four months, the market capitalisation of Paytm has fallen by over Rs 70,000 crore from the listing day. On Wednesday, the Paytm stock closed 5.20 per cent lower at Rs 452.30 as against the IPO offer price of R 2,150 — a massive decline of 79 per cent.
It’s not just Paytm either. Star Health and Allied Insurance is now quoting at Rs 599.95 as against the offer price of Rs 900, and PB Fintech is down to 400.65 from its IPO offer price of Rs 980. Cartrade crashed from the IPO price of Rs 1,618 to Rs 484.15 on November 23.
Nykaa (FSN E-commerce) is down at Rs 171.65 (after stock split) as against the 52-week high of Rs 429.86 registered on the BSE. Nykaa’s market capitalisation has nearly halved from around Rs 1 lakh crore to Rs 48,890 crore on Wednesday. The company had recently announced a 5:1 bonus issue amid the sell-off. As per the adjusted closing price, the stock is currently trading 23 per cent below its IPO offer price of Rs 1,125.
In fact, 23 of the 43 public issues between June 2021 and December 2021 are currently trading below their issue price.
What should investors do?
As these stocks continue to remain under pressure, there are several views among experts. While existing investors sitting on losses can wait or exit depending upon their entry point and the losses they are sitting on, experts advise caution when it comes to making a fresh entry into these stocks. Many feel that the pressure on these companies may continue for some time, and they may fall further.
“Investors must wait. It will take time to reach the bottom. We believe it can test 350 levels after some consolidation. It is possible to accumulate near these levels for the long term,” said Ravi Singal, CEO, GCL, on the fall in Paytm shares.
Some feel that as large shareholders continue to dump the shares of these companies as they are trading weak, their share prices may remain under pressure in the near future.
Promoter holdings in some of these companies have come down as the lock-in period ended.
Last year, Sebi decided that if the objective of the issue involves offer for sale or financing other than for capital expenditure for a project, then the minimum promoters’ contribution of 20 per cent should be locked in for 18 months from the date of IPO allotment as against the three years earlier.
Also, the promoter shareholding in excess of 20 per cent needed to be locked in only for six months as against one year earlier. The lock-in of shares held before the IPO by non-promoters was cut to six months from one year.
Why was there a rush in 2021?
The boom witnessed in the IPO market in 2021 was in line with the Sensex rally. “During April 2021 to October 2021, when the Sensex jumped from the 40,000 mark to the 60,000 mark, 49% of the IPO issuances were reckoned. This was also the period of gradual strengthening of the Indian economy after the Covid-induced slowdown. Robust macro fundamentals in terms of a stable currency, adequate external buffers and ample domestic liquidity provided comfort to investors,” a Bank of Baroda report says.
The situation changed in 2022 with financial tightening globally and in India. During the 2021-22 fiscal, companies raised Rs 1.30 lakh crore from the primary market. During the first seven months of 2022-23, companies raised around Rs 38,000 crore through IPOs.
Geopolitical tensions, weakening of the rupee, inflation remaining above the RBI’s upper band of 6% (now for seven months in a row) and a spillover of the global growth slowdown, all have hit sentiment.
Should you invest in IPOs?
Nearly 70 companies with Sebi approvals are waiting to hit the market. Experts say that investors need to be very careful investing, especially in the high-profile new age companies where profitability is an issue.
Experts feel that while the new-age technology companies demanded high premiums and benefitted from the liquidity in the market and investor enthusiasm around these firms during the pandemic, the sentiments have tapered now — and given the past experience, investors would be more cautious.
“It is important to understand that when the market corrects, investor confidence is shaken even if a company declares a decline in profits in one quarter. So, in most of these companies where profitability is not visible for the next five years, it is very tough for an investor to stay invested, and that is what has been happening,” said the head of research with a leading financial services firm.
Experts feel that rather than IPOs, investors should go with companies that have been tested in the markets over some time. “Companies with less leverage, operating in sectors with high growth potential, and leaders in their segments should be preferred by investors,” an analyst said. He added that before investing in IPOs, one must look at the quality of the promoter, corporate governance practices, financial and peer review analyses, and check the valuation the company is demanding.