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18 of top 30 IPOs fail to generate excess returns: What does it mean for investors?

A recent study by Capitalmind Financial Services reveals that 18 of the top 30 largest IPOs have failed to generate excess returns compared to the CNX500 index. This includes some high-profile disappointments like Reliance Power. On the flip side, Zomato, Hindustan Aeronautics, and a few others have delivered meaningful returns. For investors, it's crucial to tread carefully with IPO investments, as optimism around these offerings often doesn't translate into long-term gains.

Why are so many big IPOs failing to generate excess returns?

The allure of an initial public offering (IPO) is undeniable. For investors, it represents a rare opportunity to get in on the ground floor of a company, often with hopes of astronomical returns. But, as a recent study shows, things don't always pan out as expected. Out of the top 30 largest IPOs by offer size in India, a staggering 18 have failed to generate returns that outpace the CNX500 index, a widely followed benchmark of market performance.

It is a reality check for anyone assuming that big IPOs automatically mean big gains.


So, What’s Going wrong? Why Aren’t IPOs Living up to the hype?

Capitalmind’s analysis reveals a crucial insight: IPOs tend to surface in bullish markets, where the mood is already optimistic, often giving companies optimistic valuations. Investors are usually eager to buy into these new stocks, sometimes without considering whether the company’s fundamentals justify its price. But the problem arises when these valuations turn out to be inflated. The market corrects itself, and investors end up with lower-than-expected returns.

Anoop Vijaykumar, Head of Research at Capitalmind, says, “IPOs abound in bull markets... When the earnings growth to justify those valuations does not materialise combined with a mean-reversion in broader markets, high-profile IPOs end up delivering lower-than-expected returns.”

Take Reliance Power, for example. This was India’s largest IPO at the time, raising over ₹11,700 crores in 2008. Excitement was sky-high. But instead of stellar performance, the stock tanked after its listing, becoming one of the most significant letdowns in Indian stock market history. As of today, it's a shadow of its initial glory.

But Reliance Power isn’t alone. Of the 30 largest IPOs, eight have delivered negative returns. Coal India, another massive offering, did double its price over 14 years but barely matched the CNX500’s performance once dividends were included.

So, what does that mean for us as investors?


What about the IPO Winners? Are there any success stories?

Yes! While 18 out of 30 IPOs underperforming may sound dismal, there are some standouts. Among the big names, Zomato is the only top 10 IPO that has delivered meaningful excess returns. Since its 2021 listing, the food delivery platform has seen substantial growth, riding the tailwinds of India's expanding tech ecosystem and changing consumer habits.

Other notable winners outside the top 10 include Hindustan Aeronautics (HAL), Indian Railway Finance Corp, Sona BLW Precision Forgings, and ICICI Lombard. Each of these companies has managed to generate returns that beat the CNX500, giving hope to investors that, with the right pick, IPOs can indeed pay off.

Five of the top 10 IPOs are from just the last two years, including Bajaj Housing Finance, Bharti Hexacom, and Brainbees (First Cry). They’ve performed well, but much of that success is thanks to a favorable market. The question remains: will they continue to deliver once the market cycles shift?


Why do IPOs perform poorly compared to the CNX500?

The CNX500 index is a broad market benchmark, meaning it reflects the performance of a diversified portfolio of companies across various sectors. It benefits from the inherent diversification, reducing risks associated with individual companies' ups and downs.

On the other hand, investing in an IPO is much more concentrated, especially in a single company's future performance. While a company might seem promising at the IPO stage, several factors—ranging from overvaluation to unproven business models—can derail its growth.

18 of Top 30 IPOs Fail to Generate Excess Returns: What Does It Mean for Investors?

Let us take a closer look at why IPOs, especially the large ones, tend to underperform:

  1. Optimistic Valuations: Bullish markets often inflate IPO prices, leading investors to buy at unsustainable valuations.
  2. Mean-Reversion: Eventually, the broader market tends to "correct" itself, bringing overvalued stocks down.
  3. Lack of Earnings Growth: Many companies fail to meet the earnings expectations set during their IPO phase.
  4. Market Conditions: The broader economic environment significantly affects performance. IPOs launched during favorable market conditions might struggle when those conditions change.

Where do dividends fit into all this?

Dividends play a crucial role in long-term returns. For some companies, dividends can bridge the gap between a stock’s poor price performance and its total returns. For example, Coal India, which struggled in terms of price appreciation, has paid significant dividends over the years. Without those payouts, the stock's overall returns would have been even worse.

Investors often overlook dividends when evaluating IPOs, focusing solely on price appreciation. But for long-term investors, especially in companies with strong dividend policies, this steady income can be a game-changer.


What is your investment Journey Like? Have you Been Burned by an IPO?

When it comes to IPOs, stories abound—some of spectacular gains, others of crushing losses. I’d love to hear from you. Have you invested in any of the top 30 IPOs? How has your experience been? Did you strike gold or feel the sting of underperformance? Share your story in the comments below. Let’s learn from each other’s successes and missteps.


What Upcoming IPOs Should Investors be excited about?

If you’re still optimistic about IPOs and looking for opportunities, the pipeline is brimming with potential. Here are some upcoming IPOs that are generating a lot of buzz:

  1. Swiggy – With its massive reach in the food delivery space and growing diversification into grocery delivery, this one has investors talking.
  2. NTPC Green Energy – The green energy revolution is upon us, and NTPC's spinoff is well-positioned to ride this wave.
  3. OYO – Despite some controversies, OYO remains one of India’s most ambitious hospitality startups.

But here is the catch: just like with past IPOs, optimism doesn’t guarantee success. Each of these companies has its risks and rewards. If you are thinking of participating in any upcoming IPOs, make sure to do your due diligence.


FAQ about IPOs:

  1. What is an IPO?

    • An IPO, or initial public offering, is when a company offers shares to the public for the first time, allowing investors to buy equity in the firm.
  2. Why do so many IPOs fail to deliver excess returns?

    • IPOs tend to launch during bullish markets, often at inflated valuations. When these companies fail to grow into those high valuations or broader markets correct, returns tend to disappoint.
  3. Are dividends important when evaluating an IPO?

    • Yes. Dividends can significantly enhance total returns, especially for companies that don’t see substantial price appreciation.
  4. Is it safe to invest in IPOs?

    • IPOs come with risks. It's crucial to evaluate a company's fundamentals, growth potential, and whether its price at listing is justified.
  5. What are the upcoming IPOs to watch out for?

    • Some exciting upcoming IPOs include Swiggy, NTPC Green Energy, OYO etc

Is there a better approach to IPO investing?

If IPO investing feels like a gamble to you, you’re not alone. Many seasoned investors prefer to wait until after the initial hype dies down before buying shares. This allows them to get a better sense of the company’s actual performance in the public markets rather than relying on pre-IPO buzz.

Remember, the stock market isn’t going anywhere, and neither are IPOs. There's always another opportunity on the horizon. The key is patience and research.

In the world of IPOs, it is easy to get swept up by the excitement of a big launch. But as the study shows, bigger isn't always better. While some IPOs have gone on to deliver stellar returns, most have underperformed the broader market, leaving investors disappointed. As you plan your next move in the market, it’s essential to approach IPOs with caution, a clear strategy, and a deep understanding of the company you're investing in.


Tushar Mangl is a counsellor, the author of The Avenging Act. He writes on topics like Personal Finance, mental health, Vastu, and the art of living a balanced life.

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