Zomato aside, Few loss making firms had post-IPO gains in past 10 years

While 51% of profit-making companies had positive returns one year after IPO, for companies that bore losses in at least one in the previous three years, the proportion was 30%

The most important takeaway from Zomato's huge initial public offering (IPO) on the stock exchanges was that the first internet unicorn with no annual profit ever registered to date, made listing day gains of 66 per cent. The Zomato Ltd stock touched Rs 126 at the close of listing day against the issue price of Rs 76. 

Notwithstanding the frenzy that this IPO carried with it, market pundits had sounded caution precisely for the fact that the company had not registered profits ever, highlighting the unique business model of India’s biggest food start-up. 

Not many loss-making companies have tried to list on the exchanges. Business Standard analysed data for 282 companies that went public with issue sizes of more than Rs 100 crore from January 2010 to July 2021 before the Zomato listing.

The analysis found only 20 companies that had reported losses in at least one of the three years prior to the listing date. That is less than 10 per cent of all the IPOs in more than a decade. Profit before interest, depreciation and tax has been considered as pre-tax profit for the purpose of the analysis. 

In fact, Sebi, the market regular, has instituted tougher compliance norms for companies that do not have a clear track record of pre-tax profit for three years prior to the IPO. For companies without a clean record of profit, the market regulator mandates allotting 75 per cent of the offer to qualified institutional buyers (QIBs). 

Companies that had a trace of loss prior to the IPO rarely made listing gains. In other words, a smaller proportion among them made gains on the listing day. 

Not just that, the proportion of loss-making companies whose stocks gave positive returns a year after listing was also smaller than profitable companies. 

As many as 69 per cent of the profitable companies made gains on listing day, while the proportion was 45 per cent for companies that had a trace of loss in three years to listing. 

Against a proportion of 51 per cent of profitable companies that had positive returns one year after listing, only 30 per cent of stocks of loss making companies had positive one-year returns. 

This was also true for actual financial performance—read profitability—to some extent. While 88 per cent of profitable companies had improved their profits in the three year period after the IPO compared to three years prior, the proportion was 73 per cent for those with a trace of loss on an annual basis. 

But the analysis of 20-odd companies that had seen loss prior to listing since 2010 shows yet another insight. 

It was the IPOs in the period closer to the global financial crisis (2008) that mostly had negative listing gains. More recent listings of companies with a recent loss record generally saw positive gains on the day of listing.