Cheaper, fresh-issue IPOs deliver stronger gains for investors who hold on

Low-P/E IPOs delivered strong post-listing gains, while expensive issues saw returns front-loaded at listing

Investors who bought this year's cheaply priced initial public offerings (IPOs) and held on have been well-rewarded, especially when the money raised went to the company rather than to exiting shareholders.

 

Of the 38 mainboard issues listed between January and August with reported earnings, the 12 priced below 20 times earnings returned a median 45.4 per cent by September 29, against 33 per cent for all such issues, according to Capitaline and Prime Database data. Most of those gains came after the debut: the shares opened at a median premium of only 5.3 per cent and have since risen by a median 35.2 per cent from their listing-day close. Nine of the 12 raised mainly fresh capital, and they returned a median 51.3 per cent.

 

Pricier issues, valued at 30-50 times earnings, returned more, a median 58.8 per cent, but their gains came upfront. They listed at a median premium of 23.2 per cent and have added only 10.5 per cent since. This band was offer for sale (OFS)-heavy, with existing shareholders accounting for 81.8 per cent of the ₹22,998 crore raised. Indo-MIM (priced at 40.8 times, 157.5 per cent above its offer price) and Shadowfax Technologies (43 times, 126.4 per cent above) led the band, while SBI Funds Management (38.1 times) and Fractal Analytics (47 times) trade 9.8 per cent and 16.2 per cent below their offer prices, respectively. Indo-MIM was 87 per cent OFS, while SBI Funds Management was a pure OFS.

 

The three pure OFS listings in the band — Central Mine Planning & Design Institute (priced at 18.4 times, 24.1 per cent above its offer price), CMR Green Technologies (19 times, 18.7 per cent above), and Hexagon Nutrition (14.1 times, 44 per cent above) — returned a median 24.1 per cent.

 

"No valuation multiple listings leave enough on the table for investors. In pure OFS IPOs, where the private investor is exiting or the founders are selling, they go for the highest valuation and don't leave much on the table," said Abhay Agarwal, founder and fund manager, Piper Serica.

 

Higher price-to-earnings (P/E) multiple IPOs actually throw mixed data. These companies command higher multiples because they are growing at a faster rate. “Indo-MIM has a high P/E multiple. But the growth is so solid that the high P/E multiple didn't matter because once you look at the price earnings to growth ratio, it still makes sense to invest," Agarwal added.

 

The three issues priced above 100 times returned a median 20.8 per cent, the weakest of any band. Leap India, priced at 133.2 times, trades 13.5 per cent below its offer price.

 

Among the cheaper issues, Technocraft Ventures (priced at 19.4 times, 127.1 per cent above its offer price), Xtranet Technologies (16.5 times, 114 per cent above), and Onemi Technology (9.6 times, 109.9 per cent above), all largely fresh issues, were the top gainers. Alpine Texworld, an all-fresh issue priced at 18.7 times, trades 53.4 per cent below its offer price.

 

Analysts warn against companies where the latest year suddenly shows spike in profits.

 

"If you look at their earnings trajectory over the last three years, you will see a very sharp spike in recent profitability. For example, a company that earned a ₹20 crore profit three years ago grew to ₹30 crore, and then suddenly surged to ₹60-70 crore last year — optically making it look like a low-P/E IPO. But a lot of accounting jugglery takes place just to front-end the profits, make the IPO attractive, and justify the valuation. They (IPOs/new listings) all try to make it a big success but the smaller ones are more susceptible (to these accounting juggleries)," said an analyst.

 

"Ultimately stock prices are slaves to earnings. There might be a divergence in the medium to short term. There can be a froth in the valuations, so this gets adjusted over a period of time, and (the) market knows how to adjust," said Kranthi Bathini, equity strategist, WealthMills Securities.