Famous IPOs: lesson learnt from their success and failures

In this article, we will cover

• What is an IPO?
• Examples of successful IPOs in India
• Example of Unsuccessful IPOs

IPO share price varies a lot in the first few weeks of listing. It is considered a high-risk investment as one can either multiply or lose their investments very quickly. In the history of the Indian stock market, there are IPOs that have doubled investor’s money on the day of listing while there are also those that have erased investor’s wealth. Investors hoping that all IPOs will list at a massive premium are in for a shock as we learn about many big names falling flat and wiping out investors' wealth. There is a lot to learn from the success and failures of past IPOs. One should learn from the past when investing in IPOs of the future. In this article, we will take a look at some of the successful IPOs that made whopping money for their investors and at the same time some not-so-successful IPOs that faded away after listing, in recent years.

What is an IPO?

A privately held company may issue new shares to the public for the first time through a process known as Initial Public Offering (IPO). An IPO enables a business to attract equity funding from the general public. In an offer for sale, existing shareholders sell shares and keep the funds. In a fresh issue, the company issues new shares. The funds could be used to grow or expand the business, pay off debts, fund new acquisitions, add capex or provide liquidity to early investors. A company hires an investment bank to act as an underwriter to facilitate the sale of shares to investors. The underwriters help to set the initial share price. The initial share price is usually set based on the company’s financial performance, industry trends, and market conditions. Once the shares are sold to the public, the company’s shares are listed on the primary stock exchange where they can be bought and sold by investors. The shareholders of the Company are free to exit their investment through the secondary market. Many people who have little knowledge of the stock market and who do not regularly invest in the market, also find investing in IPO an attractive bet as quick money can be made on premium listings. Data from the Securities and Exchange Board of India (SEBI) shows that the average investment by retail investors in IPOs was around Rs. 69,000 in 2020, the proportion of retail investors in IPOs increased from 15% in 2016 to 30% in 2020.

Examples of successful IPOs in India

Whenever the market is in a bull run, companies flock to issue their IPO as it is much easier to raise capital and get listings at a premium when the market is doing well as opposed to when the market is down as investors get cautious. As the Sensex touches an all-time high post-recovery from Covid, there has been a slew of IPOs that have come over the last two to three years. In fact, the year 2021 was the best for the Indian IPO market over the last two decades. IPOs of companies like Adani Wilmar, Venus Pipes, and Tubes, Hariom Pipes Industries, and Droneacharya Aerial Innovations have done exceedingly well and have turned out as multi-bagger stocks.

1. Adani Wilmar

The Adani Wilmar IPO is the best-performing initial public offering among all the listed stocks in the Indian share markets in recent years. On the listing date, Adani Wilmar Limited's shares closed at Rs 265.2 against the IPO issue price of Rs 230. The listing day gain was Rs 35.20. Since listing, Adani Wilmar share prices touched a high of Rs 878 a piece but have since come down to Rs 411.4 as on 21 April 2023 on NSE. Adani Wilmar is a 50:50 joint venture between Adani Group and Singapore's Wilmar International Ltd. Adani Wilmar entered the food products market in 2013 and now are one of the fastest growing companies in the sector. The company’s product portfolio includes- edible oil, FMCG and packaged foods, and industry essentials. The company has a well-diversified product portfolio with many products acquiring the highest market share in its category.

2. Venus Pipes and Tubes

The IPO was launched in May 2022 at a price band of Rs.310-326 apiece. It made a positive listing, opening at Rs 335, against the issue price of Rs 326 on the BSE. The stock has witnessed a dream run post-listing. Venus Pipes and Tubes' share price today is Rs 886 apiece on BSE. The company is a manufacturer and exporter of stainless steel pipes and tubes. The company is expected to benefitt from the anti-dumping duty levied by the government on imports of stainless-steel seamless tubes and pipes from China, on 20th December, 2022 for a period of five years.

3. Hariom Pipes Industries

The IPO was launched in March 2022 at a price band of Rs 144 to Rs 153 per equity share and the company’s share price today is Rs 544.5 on BSE, which means the stock has delivered multi-bagger return to its allottees. The Rs 130-crore IPO of Hariom Pipe Industries was subscribed 7.93 times. The company manufactures steel MS pipes, scaffolding, HR strips, MS billets, and sponge iron. It has a wide distribution network in south India. An increase in the company’s profitability in FY21 compared to FY20, an expected higher demand for steel and the anti-dumping duty levied by the government has helped the company’s share price to soar.

4. Droneacharya Aerial Innovations

The IPO was offered at a price band of Rs 52-54 per equity share in December 2022. The public issue is listed at a staggering 90 percent premium at Rs 102. The share has hit the upper circuit on all six sessions since its listing on 20th December 2022. Droneacharya Aerial's share price today is Rs 128.55, which is more than 150 percent from its upper price band of Rs 54 apiece. The Company is a Directorate General of Civil Aviation (DGCA) authorized Remote Pilot Training Organisation (RPTO). It offers training in drone construction, aerial cinematography, data processing, Python for GIS, drones in agriculture, drones for disaster management, and drone racing. Drones are being widely used in the country across industries for surveys, deliveries, and surveillance. This segment is expected to perform strongly in the coming years.

Example of Unsuccessful IPOs

There have been a few notable IPOs that have failed to meet investor expectations in India in recent times. These are mainly the new-age technology stocks. The recent global selloff in new-age tech stocks, overvaluation, and complicated business models are some of the reasons for the failure of these IPOs. Here are some examples:

1. Zomato

In July 2021, the food delivery and restaurant aggregator company, Zomato, went public with its IPO. The company had made its stock market debut in July 2021. The IPO had listed with a price band of Rs 72-76. Despite the company’s high valuation and significant demand from investors, the stock fell sharply after listing, leading to losses for many investors. The stock is and is currently trading at Rs 56 a piece on BSE. Zomato, the Indian food delivery and restaurant aggregator platform, has faced a number of challenges in recent years. The key challenge the company has faced is competition in the food delivery space. The company faces stiff competition from another food delivery company, Swiggy as well as new entrants like Uber Eats and Amazon. Besides, Zomato has struggled to turn a profit till now and the company’s losses have continued to mount. This is mainly due to the high marketing and sales costs associated with its business model. The above factors have raised questions about the company’s long-term prospects and impacted Zomato’s IPO in July 2021. The IPO was initially met with strong investor demand but ultimately the demand faded in the months following its debut. While Zomato remains a major player in India’s food delivery and restaurant aggregator market, the company will need to address these challenges for its long-term success.

2. Paytm

Paytm’s Rs 18,300 crore IPO failed to live up to expectations on listing day. One97 Communications Ltd, the parent company of the digital payments app PayTM, lost 27% of its share price on the day of its listing of Rs 2,150. One of the major factors behind Paytm’s struggles has been the intense competition in India’s digital payments and financial services market. The company faces stiff competition from PhonePe, Google Pay, Amazon Pay as well as WhatsApp Pay. Another challenge for Paytm has been its profitability. The company has struggled to turn a profit due to its high marketing and sales costs. The valuations were stretched far beyond limits.

3. LIC

LIC IPO has been one of the biggest losers of the Indian IPO market in 2022. The public issue of the insurance behemoth was launched in May 2022. The price band was of Rs 902 -949. LIC share price opened at a discount on NSE at Rs 872 while on BSE it listed at Rs 867.20 apiece. Currently, the company’s shares are available at around Rs 547 apiece on NSE and Rs 548 on BSE. LIC being a public ltd company has been slow to adapt while the new private players have been grabbing its market share by directing the bulk of their efforts through banks they were allied with – for instance, HDFC Life Insurance pushed its products through HDFC Bank, SBI Life through SBI etc. On the other hand, LIC still depends on the Agent mechanism which has nearly no access to the upper class population and therefore has very poor conversion and earnings potential.

4. AGS Transact Technologies

The company’s share price today is Rs 63 whereas its IPO was launched at a price band of Rs 166-175 a piece in January 2022. The listing price on the BSE was Rs 176. The stock is more than 50% below its upper price band. AGS Transact Technologies is an integrated omnichannel payment solutions provider. It provides digital and cash-based solutions to banks and corporate clients. Higher valuation than its peers and fall in profitability are factors leading to the company’s tepid debut on the stock market.

Conclusion

Companies that have performed well are those that have strong growth and demand potential. These are companies that do not have massive outflow but an ability to enhance their profits. Many companies that have gone public through IPOs in India have been unable to turn a profit, leading to lower confidence among investors and an eventual decline in the share prices for some offerings. Inability to turn a profit for many years since the beginning of operations has been a significant challenge for many companies in India that have gone public through initial public offerings (IPOs) in recent years. This is majorly common for new-age technology start-ups, in areas such as e-commerce, digital payments, and food delivery. One of the main reasons for this is the intense competition in sectors where these companies operate and the overlap of business operations. Due to the intense competition and niche products, these companies have to rely heavily on marketing and sales in order to gain visibility and establish their position in the market. This cost keeps on ballooning making it difficult for them to turn a profit. In addition, regulatory challenges and compliance costs also affect the profitability of these companies. Investors in startups need to be cautious and not overvalue companies based on intangible factors. Investors should instead focus on developing a realistic understanding of the company’s fundamentals, revenue potential, cost structure, and competitive positioning. IPOs come in the cycle. When the market is in a bull run, a large number of companies flock to issue their IPOs to cash in on higher prices. With so many companies rushing to the IPO market, investors have more options than ever before and are not willing to pay the steep valuations demanded by the companies. Promoters need to keep the pricing more reasonable so that investors are able to invest in good companies at fair prices. If you wish to invest in any IPO, like the upcoming Oyo Rooms or Mankind Pharma, you should open a demat account with Samco and get your investment going.