SHOULD YOU BE REALLY CHASING MEGA IPOs?

SHOULD YOU BE REALLY CHASING MEGA IPOs?

For Indian IPO investors, it is quite natural to chase bulge bracket IPOs raising over a billion dollars from the market. But the big question is if these mega IPOs deliver in terms of shareholder returns and wealth creation? To get a true picture, we have looked at 10 of the biggest IPOs in the last 20 years in India and tested how they have performed since listing.

It is an impressive list because these 10 IPOs raised ₹1,66,679 crore between them; which is an average of around ₹16,700 crore per IPO. While this is an industry-agnostic list, there is a dominance of financial services as a theme in these mega IPOs. The broad learning is that investors must think twice before chasing mega IPOs.

HOW THE 10 BIGGEST IPOS IN INDIA HAVE PERFORMED?

The table captures the 10 biggest IPOs by issue size in the Indian market and tracks the performance on absolute returns and also on annualized returns.

Here is a quick word on the methodology of these rankings, before we move on to the findings.

The IPO open date has been used as the base reference point, since that is the first possible day that investors could have invested in the IPO.

In the case of corporate actions like bonus, splits, and rights; the current market price has been adjusted in proportion to the action.

The IPOs have been considered purely based on the issue size and no adjustment is made for time factor. Also, returns do not include dividends.

Holding period has been converted into years by dividing the number of days elapsed since the start of the IPO by 365.

WHAT WE READ FROM THE RANKING OF 10 MEGA IPOS IN INDIA?

Here are some interesting numbers that flow from a quick look at the performance of the 10 largest mega IPOs in India.

Out of the 10 mega IPOs, 6 of these mega IPOs have given negative returns. That is a loss ratio of 60%. However, these are absolute returns, irrespective of the time elapsed since the opening of the IPO.

If we look at annualized returns, then obviously, 6 out of the 10 have given negative returns. Of the remaining 4 IPOs, 3 IPOs have given annualized returns of less than 4%. That is less than what you would have earned in a savings bank or liquid mutual fund.

The only mega IPO that has actually rewarded investors in terms of annualized returns is LG Electronics, which has given 52.55% returns in the last 1 year. The rest have either given negative returns or annualized returns less than a savings bank account.

One exception to this list could be Coal India, if you add the dividends story. Coal India is 74% above its issue price, but the IPO is 16 years old. Annualized returns are just 3.53%. However, if you add the average dividend yield on Coal India of 5%-6%, then annual returns are in the range of 8.5%-9.5%, which is tad better than a debt fund.

Now comes a portfolio view. Had you invested in all the 10 mega IPOs, your returns would have been a paltry 1.93% over a weighted average holding period of 3.85 years, that is annualized returns of just 0.50% on mega IPOs. And if you had missed the LG Electronics IPO, you would be sitting on negative returns.

Why is this happening?

IS THIS JUST A FLASH IN THE PAN OR A REAL TREND?

This is a look at 10 mega IPOs over a period of 20 years, so it is a fairly long time. Mega IPOs have underperformed markets, and there could be 3 reasons for the same. Most of these large IPOs have substantial anchor books with institutional lock-ins of 1 month and 3 months. Once this period is over, there is a rush to sell out. Secondly, large IPOs tend to time the issue around the time when market levels and investor interest are at a peak.

That is essential for them. However, it also opens a bigger downside risk for IPOs. Lastly, the size effect also matters. It is easy for a company with a market cap of ₹10,000 crore or ₹15,000 crore to double. However, for an NSE or LIC with a market cap of close to ₹5,00,000 crore, returns tend to become phlegmatic. For now, mega IPOs are not rewarding investors!