Are IPOs A Good Stock Investment?

163 IPOs hit the Indian stock market between 2010 and 2015. Are IPOs a good investment?  SEBI has made it very easy to invest in IPOs. No more forms, no more wait for allotment and refunds. It’s all on the internet now.

The breakup of these IPOs over the years is as follows:

Year IPOs
2010 74
2011 40
2012 11
2013 4
2014 6
2015 21
2016 7

 

Out of these, I analyzed those IPOs that I could recognize. Surprisingly, I recognized only 49 out of these 161 companies. The analysis below is based on those 49 companies. Companies like Pradip Overseas Ltd. And Intrasoft Technologies didn’t make it.

Are IPOs A Good Investment?

Are IPOs A Good Investment?

The bottom line question is – should we or shouldn’t we invest in IPOs. Like everything else in the stock market, the answer is not black and white. This article gives you some data points that will help you make your own decision based on your risk profile.

The best IPO out of all of these is, hands down, is  Jubilant Foodworks. The offer price was Rs. 145. Current stock price is Rs. 1223, a gain of whopping 750% (over 7 years).

The worst IPO is Timbor Homes. The offer price was Rs. 23. The current stock price is Rs. 2, a huge loss of 97% (over 4 ½ years).

If you had invested evenly (allotted evenly) across all the 49 IPOs, your average absolute gain would have been 16%. The annualized return would be much lower as this gain is over the last 6 years.

The breakup of the gains over the years is as follows.

Ave. Returns Profitable IPOs Loss Making IPOs Total IPOs
2010 25% 7 15 22
2011 -32% 3 5 8
2012 31% 2 3 5
2013 55% 2 0 2
2014 46% 3 1 4
 2015 5% 4 4 8
Average 16% 21 28 49

 

Looking at the absolute return, it is quite clear that it doesn’t make sense to invest in IPOs. However, here are the other criteria one should consider before making a decision.

  1. More often than not, your number of allotted shares will be fewer than the number of shares you applied.
  2. First day returns of many IPOs would have been very different.
  3. The average return could have been very different, say at the end of 1st year, 2nd year etc.
  4. Government FPOs skew the returns.
  5. Returns could be different if you consider all the 160+ IPOs.
  6. These returns do not include dividends.
  7. Some hyped up names produced dramatic returns – SKS microfinance (-46%), A2Z Maintenance (-95%) and Coffee Day (-31%).
  8. Even a household name like Tata Steel FPO returns -48%.
  9. IPOs that gave great returns are not all household names – Persistent Systems (135%) and Gujarat Pipavav Ports (289%).
  10. Some of the IPOs turn out to be very volatile – Indigo – Interglobe aviation more than doubled within days. At the low, it gave up all the gain. At the current price, it returns 17%.
  11. Hence it is very difficult to identify “good” IPOs from “bad”.

My personal preference is to not invest in IPOs for the following reasons –

  1. No historical data available. What is available is probably window dressed for the upcoming IPO.
  2. Management is relatively unknown in most cases.
  3. Last but not the least, if you are the owner of the company going public, when would you go public? When you believe the valuation is at the peak.

Due to my personal bias, I may have saved a ton of money by not investing in IPOs. But, I did lose a huge opportunity by not investing in Google on the day it was listed. Likewise, people who invested in the IPOs of HDFC and HDFC Bank have made excellent investments.

Follow my Real World Value Averaging experiment here.

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