Why fervour in primary market fails to last in secondary market
Experts pointed out that premium valuations of the issues in some cases, and profit booking in others, are taking a toll on new issues. That said, select IPOs can prove good investments if held for a longer period of time.
- May 6, 2016,
- Updated May 6, 2016 2:03 PM IST
Even as the recent spate of initial public offerings (IPOs) have drawn huge response from retail and qualified institutional buyers (QIBs) alike, data suggests the performance of the new listings have been far from being decent this year. Experts pointed out that premium valuations of the issues in some cases, and profit booking in others, are taking a toll on their performances. That said, select IPOs can prove good investments if held for a longer period of time, they said. Among eighth BSE debutants so far in calendar 2016, five have seen their stocks losing up to 14 per cent since their listings as smart money moved out post healthy listing gains.
HealthCare Global Enterprises (HCG) has plunged the most, with 13.97 per cent fall over its listing price of Rs 209.80. It was followed by Bharat Wire Ropes, which has shed 13.62 per cent since its listing on April 01, 2016. This stock had got listed at a 5 per cent premium to its issue price. Quick Heal Technologies too has lost nearly 13 per cent since its listing on February 18, 2016. Stocks of Infibeam Incorporation and TeamLease Services, meanwhile, managed to keep up the IPO fervour and gained 13.5 per cent and 10.2 per cent, respectively. So what explains IPOs' tepid performance in the secondary market after throwing a stellar show in the primary market? Nikhil Kamath, Co-Founder & Director of Zerodha attributes this to exodus of smart money. "A lot of vested interest relies on the IPO's performance at listing, which definitely helps lift the price. But with time major amount of smart money involved with the issue get diluted, which results in the malaise we see in most new issues," told Kamath to Business Today online. Kamath said that a plethora of retail investors, who are generally not considered to be the strongest or smartest hands, are drawn to IPOs, often persuaded by the ornate thesis put forth by underwriters and stockbrokers. More often than not, the noise dies down and the weak hands wane, resulting in fall in stock prices, he said. However, the expert cautioned investors not to generalise IPOs, as many good issuances come up from time to time and doesn't follow the general trend.
Ankur Varman of SBICAP Securities attributed the fall to IPOs' premium valuations and profit-booking in them post listing. "Some IPOs are priced to perfection leaving nothing on the table and even a slight slip-up on the subsequent numbers send the stock crashing to a more reasonable level, while in other cases the traders punt for a quick listing gain and hence selling comes on listing," said Varman. Will the IPO flurry last? Analysts are bullish on pick-up in Indian economy with International Monetary Fund and World Bank projecting rosy outlook for country's growth picture. A thriving economy will reflect itself in the stock markets as well. In this back drop, Varman of SBICAP Securities said the ongoing IPO flurry will not end anytime soon. "A lot of good companies are coming to the equity markets. The choices that an equity investor will get is going to be unbelievable. The Indian corporate is awakening to the positives that are there for a listed entity, which will keep the IPO pipeline going. However, from time to time there will be some lemons along the way which one needs to avoid," said Varman. Stay put for long New issuances may not have fared well, but Gaurang Shah of Geojit BNP Paribas advises investors to look at IPOs for the long-term. "A lot of small investors invest in the IPOs only to clock listing gains, which should not be the case. People should think about staying put for long-term if business model is good and valuations are fair," told Shah to Business Today online. Shah believes good times seems to have started for the primary market investors as a spate of rules have been changed by market regulator Sebi to protect the investors' interest. "A lot of disclosures are required before launching an IPO, which has made it a level-playing field for companies. Promoters and advisors are realising they will have to do justice with the valuations. Nobody is going to look at IPOs if valuations are kept unnecessarily high," said Shah.
Even as the recent spate of initial public offerings (IPOs) have drawn huge response from retail and qualified institutional buyers (QIBs) alike, data suggests the performance of the new listings have been far from being decent this year. Experts pointed out that premium valuations of the issues in some cases, and profit booking in others, are taking a toll on their performances. That said, select IPOs can prove good investments if held for a longer period of time, they said. Among eighth BSE debutants so far in calendar 2016, five have seen their stocks losing up to 14 per cent since their listings as smart money moved out post healthy listing gains.
HealthCare Global Enterprises (HCG) has plunged the most, with 13.97 per cent fall over its listing price of Rs 209.80. It was followed by Bharat Wire Ropes, which has shed 13.62 per cent since its listing on April 01, 2016. This stock had got listed at a 5 per cent premium to its issue price. Quick Heal Technologies too has lost nearly 13 per cent since its listing on February 18, 2016. Stocks of Infibeam Incorporation and TeamLease Services, meanwhile, managed to keep up the IPO fervour and gained 13.5 per cent and 10.2 per cent, respectively. So what explains IPOs' tepid performance in the secondary market after throwing a stellar show in the primary market? Nikhil Kamath, Co-Founder & Director of Zerodha attributes this to exodus of smart money. "A lot of vested interest relies on the IPO's performance at listing, which definitely helps lift the price. But with time major amount of smart money involved with the issue get diluted, which results in the malaise we see in most new issues," told Kamath to Business Today online. Kamath said that a plethora of retail investors, who are generally not considered to be the strongest or smartest hands, are drawn to IPOs, often persuaded by the ornate thesis put forth by underwriters and stockbrokers. More often than not, the noise dies down and the weak hands wane, resulting in fall in stock prices, he said. However, the expert cautioned investors not to generalise IPOs, as many good issuances come up from time to time and doesn't follow the general trend.
Ankur Varman of SBICAP Securities attributed the fall to IPOs' premium valuations and profit-booking in them post listing. "Some IPOs are priced to perfection leaving nothing on the table and even a slight slip-up on the subsequent numbers send the stock crashing to a more reasonable level, while in other cases the traders punt for a quick listing gain and hence selling comes on listing," said Varman. Will the IPO flurry last? Analysts are bullish on pick-up in Indian economy with International Monetary Fund and World Bank projecting rosy outlook for country's growth picture. A thriving economy will reflect itself in the stock markets as well. In this back drop, Varman of SBICAP Securities said the ongoing IPO flurry will not end anytime soon. "A lot of good companies are coming to the equity markets. The choices that an equity investor will get is going to be unbelievable. The Indian corporate is awakening to the positives that are there for a listed entity, which will keep the IPO pipeline going. However, from time to time there will be some lemons along the way which one needs to avoid," said Varman. Stay put for long New issuances may not have fared well, but Gaurang Shah of Geojit BNP Paribas advises investors to look at IPOs for the long-term. "A lot of small investors invest in the IPOs only to clock listing gains, which should not be the case. People should think about staying put for long-term if business model is good and valuations are fair," told Shah to Business Today online. Shah believes good times seems to have started for the primary market investors as a spate of rules have been changed by market regulator Sebi to protect the investors' interest. "A lot of disclosures are required before launching an IPO, which has made it a level-playing field for companies. Promoters and advisors are realising they will have to do justice with the valuations. Nobody is going to look at IPOs if valuations are kept unnecessarily high," said Shah.