Lessons Learnt From New Age IPOs

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Last year many new-age technology companies listed with much fun-fare. In the last six months many of them have sharply eroded the value of their investor’s wealth. What lessons an investor should learn from this?

Spanish philosopher George Santayana is credited with the aphorism, “Those who cannot remember the past are condemned to repeat it.” It is true in all walks of life and investment world is no exception.

We saw last year (2021) many new-age companies made their way to the public markets on Indian and international bourses. Many of them were household names and were able to make stellar debuts. The performance of newly listed companies is well captured in the S&P BSE IPO index. This index is designed to measure the performance of companies listed at BSE after the completion of their initial public offering (IPO). The index is calculated using a modified market-cap-weighted methodology. At each rebalancing, the maximum weight of each constituent is capped at 20%.

For the calendar year 2021, BSE IPO index generated return of 55.6 per cent compared to 21.9 per cent by Sensex and 30.11 per cent by much broader index BSE 500. Even in year 2020 we saw IPO index outperforming these indices. For year 2020, Sensex gave return of 15.8 % while BSE 500 gave return of 18.41 per cent compared to IPO index 27.56 per cent.

Nonetheless, in last six months as tide is turning, IPO index has started to underperform the main indices. Since the mid of month of October 2021, BSE IPO Index is down by 21.7 per cent while Sensex is down by one third of it at 6.9 per cent.

This table will give a glimpse of returns by the different indices in different periods.

Year Ended Sensex BSE IPO Index
31-12-2020 15.8% 27.6%
31-12-2021 22.0% 55.7%
30-04-2022 -2.0% -14.4%
Last Six Months (Oct-April) -6.9% -21.7%

The adjacent graph captures the performance of Sensex and BSE IPO index since the start of year 2020. It is clearly visible that after outperforming for most part of last two years it has started under-performing in last six months.

Investors still licking their wounds

One of the reasons for such a fall in the IPO index is huge underperformance of new-age technology stocks. Last year several new-age stocks listed with a lot of ballyhoo at the peak of the bull market. Some of these stocks traded with at market cap of more than one lakh crore. Now these stocks are falling into a bottomless pit. The food delivery platform Zomato hits all-time low in the month of April and wipes out half of investor wealth in first 4 months of 2022. The scrip has dropped about 12 per cent in the month of April itself. Zomato’s stock price dwindled to the lows of Rs 71.6 on Friday, April 28 from the highs of Rs 141.35 on January 3, the first trading session of the year.

Investors who had placed high bets on new-age tech companies are now left regretting their decision as many of them are trading below their issue price. These include names like Zomato, PolicyBazaar and Paytm; all of them made stellar debuts and subsequently lost value sharply. The performance of new-age technology companies in the stock market has been a topic of heated debate of late after tech stocks tanked on bourses. In the wake of losses, the high valuation of startups for private placement at pre-IPO and IPO stage, and the issue pricing were subjected to close scrutiny.

There were voices raised earlier by few market participants whether the highly-trumpeted initial public offerings of new-age tech companies was a big bubble. The biggest criticism was that promoters and founders were rushing their loss-making entities to the market and dumping their holdings on public shareholders to earn a fortune. Take the case of one of the most awaited IPO of One 97 Communications – the parent company of Paytm. After debuting on the stock market, it almost instantaneously eroded investors’ wealth by a whopping Rs 32,000 crore within minutes of listing. Against the issue price of Rs 2150, shares of company listed at Rs 1955. While the investors were still licking their wounds, the selling shareholder who had offered their shares in the share sale (OFS) – mostly the external supplier of capital – walked away with a neat Rs 10,000 crore.

2021 was a buzzing market for IPOs

The Indian primary market was buzzing throughout the year of 2021. Data shows that 63 companies collectively raised Rs 1,18,704 crore (USD 15.4 billion) through IPOs during 2021. This is the highest amount of money raised through IPOs in a calendar year. The previous best year for IPO was 2017 when Rs 67,147 crore was raised.  In fact, the money raised in the primary market in 2021 is 62 per cent more than the total amount of Rs 73,003 crore raised in the preceding three years (2018 to 2020). During 2020, the total money raised through IPOs in India stood at Rs 26,613 crore, which was nearly one-fifth of the mop-up during 2021.

The average issue size during the year 2021 stood at Rs 1,884 crore. The bullish trend at the stock markets buoyed the investors` interests in the IPOs. The benchmark indices of the Indian stock markets hit new highs during the year. Sensex of the Bombay Stock Exchange (BSE) hit a record high of 62245.43 points while Nifty 50 of the National Stock Exchange (NSE) touched its all-time high of 18,604.45 points on October 19, 2021.

History of Money Raised Through IPO

Year No. of Issues Issue Amount (Rs. Crore)
1989 102 216.31
1990 111 316.25
1991 126 564.18
1992 332 1,322.78
1993 564 3,144.31
1994 1020 6,085.32
1995 1341 7,998.14
1996 1067 4,703.08
1997 109 1,853.40
1998 15 289.41
1999 33 1,821.42
2000 123 2,953.11
2001 13 295.81
2002 6 1,981.47
2003 12 1,699.80
2004 25 13,121.47
2005 53 9,989.52
2006 73 19,852.46
2007 100 34,179.11
2008 37 16,904.42
2009 20 19,544.00
2010 64 37,534.65
2011 37 5,966.28
2012 11 6,835.28
2013 3 1,283.79
2014 5 1,200.94
2015 21 13,614.08
2016 26 26,493.84
2017 36 67,147.44
2018 24 30,959.07
2019 16 12,361.56
2020 15 26,612.62
2021 63 1,18,723.17
2022 (till APRIL,2022) 8 10,670.70
Source : PRIME Database

Lofty Valuation

The record fundraising from the Indian primary market was led by the new-age technology businesses. Most of these companies were loss-making, cash burning technology start-ups. They saw strong retail participation as many investors knew these companies and had used their products.

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About the author: IE&M Team
IE&M Team
Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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