How have big IPOs performed: The hits, misses, and lessons learned

Large IPOs always create a huge hype. Investors are always excited to participate in these IPOs. The perception is that large IPOs will mostly get oversubscribed, so the chances of getting a good same-day return on the listing day are high!

If not, one can always become a long-term investor and wait for a good exit.

But is that really the case? Does allotment in a large IPO guarantee strong results and should investors do away with the research and logic that they would otherwise employ in other IPOs?

Let’s take a look at the top 10 largest IPOs in India and how they have fared.

Here is how the biggest IPOs fared.

Source: Chittorgarh.com. Data as of 14th Oct-24

Listing day

Out of the top 10 IPOs, ~60% of them ended up with negative listing day returns, with the average listing gain only at around 6% for the whole group.

1-year post listing

1-year post-listing trends suggest contrasting performance, the most of the IPOs with negative listing gains ended up with positive 1-year returns post-listing like LIC, Paytm, New Assurance India. While Zomato, DLF which opened with positive listing gain posted negative 1-year returns post listing. GIC and Reliance Power continued to be in a negative trajectory.

Overall gain/loss (compared to issue price)

Absolute performance for the biggest IPOs has been mixed. Contrary to the general perception, years after listing, many companies continue to trade below their issue price.

Why would this be the case?

While we do not go into company-specific reasons - we attempt to look at some general reasons for this underperformance.

Pricing considerations

Large IPOs often launch with high investor expectations and ambitious initial valuations, which can limit the potential for substantial price increases right after listing. This impact of this is felt a lot on listing day. If investors feel the pricing is on the higher side, they may prefer to wait for better buying opportunities, leading to price stabilization and sustainable valuation.

Market conditions

Big IPOs typically debut during periods of positive market sentiment. While this can boost initial interest, it can also coincide with the broader market peaking out or slowdowns, causing a correction in stock prices.

Possible growth slowdown

Companies that launch with substantial IPOs typically possess a large business scale, which can lead to challenges in maintaining high growth rates due to their sizable operational base, potentially resulting in perceived underperformance.

Does that mean, one should stay away from big IPOs?

Not really. The past is only an indication and does not mean all big IPOs will go the same way.

How should investors approach big IPOs?

• Focus on the valuations of the IPO as compared to its listed peers. Valuation matter! So, if they appear stretched compared to peers - maybe err on the side of caution.

• IPOs that have a significant Offer-For-Sale (OFS) portion should be approached with some caution. The funds raised will be used for giving existing investors an exit (nothing wrong with that), rather than for future growth.

• Investors need to analyse the market sentiments for the IPO-bound company’s respective sector whether they are heading for the IPO at the bottom or the top of the cycle.

• Analysing a company's RHP will help investors understand risk factors, business growth plans, industry dynamics and key triggers for the company.

Overall, investors should focus on studying the company fundamentally.

Conclusion

The performance of big IPOs in India has been a mixed bag, with some delivering exceptional returns and others failing to meet expectations. At the end of the day, an IPO is also like investing in any stock. The same research and rigour that is required to invest in stocks, must be employed here as well.