Valuable lessons in IPO investing from the fiscal year just gone by

The markets ended FY22 positively and this week the fear meter indicator India VIX eased. Primary markets seem to be bustling again when D-street finds stability. Although FY22 was a record year for IPOs, the pace is expected to continue during FY23 as well. Thanks to the booming bull market, 74% of the IPOs that hit D-Street in the closing budget provided excellent listing returns that reached up to 270%. With that said, the real beneficiaries of this IPO craze were the PE / VC investors, who managed to pull off an amazing Rs. 827 billion from the Indian primary markets, more than times what they received in FY21.

When bull markets flourish, euphoria takes over the primary markets, making it an optimal opportunity for promoters and PE / VC investors to demand extravagant values ​​for their companies. Irrationality prevails as a result of the greed for fast money, and all investors rush in to grab a piece of the cake regardless of the price.

What investors do not understand is that when circumstances change, these companies underperform significantly. Although the BSE IPO index beat Sensex below FY22, it has underperformed by 17% over the past six months.

In fact, currently over 60% of IPOs under FY2021-22 are traded below the listing price and around 40% are even traded below the issue price, which impoverishes investors’ wealth, especially private investors.

Sebi recognizes the pain of private investors and has proposed tightening certain rules for locking in anchor investors, criteria for offering for sale and pricing of new loss-making units. If there is one takeaway that private investors should keep in mind from FY22, it should be to resist such hysteria.

Instead of falling victim to FOMO, they should analyze each IPO based on their own strengths, given that overpriced ones will most likely be available at a lower price when the frenzy ends.

This week’s event

Mergers and acquisitions (M&A) deals in India reached a record high in 2021, and this week seemed to set the stage for 2022. Three massive mergers were announced on D-street, including one in the cinema’s showroom that almost gave the merged business a lion’s market share. The Street reacted positively to all three news and the respective shares rose sharply. It seems that inorganic growth games and industrial consolidation themes have begun to dominate.

In 2021, 60% of transactions between companies were in the same industry. Rather than just growing, the basic purpose of such mergers has been to change a company, gain significant penetration and scale. Larger companies, on the other hand, are reshaping their portfolios and expanding into emerging business sectors with inorganic funds. While FY22 saw most technology acquisitions, it would be interesting to observe how the pattern unfolds during FY23.

Technical view

The market showed a couple of gap-up lights and closed in green for the week despite rather weak global markets. After the narrow range trading last week, the Nifty index seemed to have found a cushion around 17,000 levels. With the benchmark successfully breaking over 17,500, the short-term trend continues to be bullish. Therefore, we suggest that traders maintain a bullish bias with a focus on a retest of the immediate resistance zone around 17,800 levels. Declines on the downside are likely to remain limited around 17,000 levels.

Expectations for the week

FOMC protocols that will be published next week will affect markets globally. Once home, RBI’s MPC meeting will be about the city, which drives the market sentiment. Unlike its competitors abroad, RBI has so far prioritized growth over inflation. The changing macro dynamics caused by the war, the Fed’s planned interest rate hikes and the need to promote domestic demand and support the government’s increased borrowing set out in the budget have put RBI in a tricky situation and everyone’s eyes will be on how RBIs are approaching.

These variables, together with the pricing of the profit season’s expectations, can trigger nervous fluctuations in our markets. Investors are therefore urged to be careful before making any aggressive investments. Nifty50 closed the week at 17,670.45, up 3.02%.

Yesha Shah is Head of Equity Research at Samco Securities

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