The majority of the initial public offerings (IPOs) listed this year counted their blessings looking at the market momentum, and now reality doesn't match their expectations. As per the data, big IPOs are not in a good state because some of them are trading lower than their issue price. Not an optimistic indicator! While we deep dive into this space, let’s not forget the overall stock market behaviour that’s in a bear mood. It’s important to factor it in while analysing IPO’s performance. Let’s read up!
What Went Wrong?
Not just in India, some of the biggest IPOs around the world are trading below their issue price. Let’s take Paytm as an example first, the stock is still trading lower than its issue price of Rs 2,150 per share. If we widen our lens and move towards the international market, there’s a British food delivery giant called Deliveroo. The company saw its shares spiralling down 25% after its much-hyped market listing. This stands as a bit of a concern because investors believe the big IPOs would do well, but when they don’t, there’s a feeling of failure that leads to the outflow of funds.
According to data, 49% of IPOs that raised over $1 billion across the globe are now worth less than they were when they got listed. This means that either the valuation of the company is expensive or the market, in general, is in selling mode.
What Should Be Done?
Before investing in any IPO, it’s important to especially check the red herring prospectus (RHP) of the company. This document is a holy grail to experienced investors and should be for you too. RHP consists of every detail of the company, from financials to industry overview to information about the promoters etc.
This stands even more important because it’s been seen that investment banks, who decide the listing price of an IPO, overestimate valuations. Yes, that’s possible! When this happens, the stock eventually gets dumped when reality hits in.
What Lies Ahead?
This pattern seems to be repetitive in nature. That’s why it’s always advisable to carry your research before any investment. For instance, this year’s IPO boom fared well for the investment banks. Even more so because they made big fees out of every company debut. This big money was then transferred to their investors in the form of dividends and share buybacks. In the end, investment banks made more money instead of the big listed companies. This teaches us that we need to be cautious and not follow the crowd.
