After a frenzied day-one pop, most IPO superstars often bite the dust

Four of the five most-subscribed initial public offers are down 12-71% over day-one listing gains

Mrs Bectors Food Specialities on Thursday became the fourth issue this year to see oversubscription of over 150 times. And a few days earlier, Burger King India was the fifth debutant this year to see its shares soar at least 70 per cent over the issue price.

But if history is anything to go by, very few IPOs have turned out to be good long-term bets. A stock may not hold promise just because it shows a huge day-one pop, data shows. In fact, it is quite the opposite, analysts say.

If one compares the current stock prices of companies that have clocked the best-listing day gains, it paints a gloomy picture. The average return since their day-one close for the top 20 listings since 2010 is a negative 6 per cent. Those who had bought shares of seven of these 20 stocks at their first-day close would have seen at least 50 per cent erosion in their investment by now. And returns are negative in 13 of the cases.

The same applies to IPOs that have seen the maximum oversubscription. If one looks at the five most subscribed IPOs, four are currently down 12-71 per cent over their day one close.

There are a few exceptions to this rule: Stocks like Avenue Supermarts, CDSL, and HDFC AMC have turned out to be good bets even for someone who bought them during their maiden share sale or even after their first-day surge.

So what explains the recent frenzy?

“The demand in primary market is a reflection of sentiment in the secondary market. At present, the broader market stocks are also rallying due to the liquidity gush. This along with premium listings of recent IPOs is drawing a lot of investor towards newer IPOs. In the near term, this is playing out well. But one should remember, once the euphoria dies down, fundamentals and business outlook take over. Investing by merely looking listing gains is risky. Investors might get lucky with some stocks, but may get caught in the wrong foot in most cases," said Geetanjali Kedia, senior research analyst, SP Tulsian Investment Advisory Services.

Investors are baking in lofty expectations in case of some companies that have listed recently. Achieving high-growth targets is desirable but may not always be achievable, say experts.

Many retail and high networth individual (HNI) investors have made eye-catching returns on many of this year’s listings. This has prompted them to aggressively bid for any IPO that is coming to the market. Also, many of the recent floats are relatively small-sized, so high networth individuals and institutional investors have to raise their application size to improve their chances of allotment. This is leading to optical oversubscription.

Market observers say many new entrants to the stock market arena are getting lured towards IPOs with an intention of making quick gains.

"There has been a sharp increase in demat accounts in recent months. A lot of these investors are active in primary markets. As a result, we have seen the number of retail applications in IPOs go up. The desire to cash in on listing gains is all pervasive. However, good listing and subscription do not guarantee good performance post listing. One just has to look at past data,” said Arun Kejriwal, founder, Kejriwal Research & Investment Services.