Caution! Oversubscribed IPO Does Not Mean Better Returns
Oversubscription is quite a tricky metric, not to be taken at face value.
The country’s biggest initial public offering (IPO) Paytm was oversubscribed 1.89 times in November.
But on its market debut, its stock price crashed over 27%.
Sigachi Industries’ IPO was subscribed 101.90 times. The shares touched Rs 603.75 on the listing day but just a month later its stock price has slumped 35%.
In the year of too-many market listings, you may have heard or read about IPOs being ‘oversubscribed’. But if you think a 100% oversubscription means 100% returns, this is a pure myth. Too many retail investors have burnt their fingers, so we, at Masters’ Union Investment Fund, thought to address this.
During its IPO in March 2020, SBI Cards was oversubscribed 26 times. Almost 20 months since, the stock has crashed 14% primarily on the back of factors like Carlyle selling the stake, Covid-led business slump, and rise in bad loans.
A common misconception is that oversubscription automatically translates to stellar market returns. While investment bankers may brag about how the subscription figures reflect their success, the reality differs on a case-to-case basis.
An IPO is oversubscribed when the demand for shares is higher than the number of shares on offer. Now the demand could either be high because the company is popular among investors or because the pricing is affordable.
Factors like the company’s business strategy, valuation, financial performance and market sentiments impact the stock price post listing.
In Nazara Technologies’ case for instance, the stock tanked 12% earlier this year after global brokerage CLSA called it ‘overvalued’. This occurred irrespective of the gaming company’s IPO being oversubscribed 175 times.
Risk factors play a part
The draft prospectus that is filed ahead of a company’s IPO holds the key to its future. Investors study the financial history of the issuing company to verify its future potential.
In an IPO, marquee institutional investors like large insurers, mutual funds, and global investment banks are given a portion of the shares. A lot of these ‘anchor’ investors buy shares for listing gains if they don’t see any long-term opportunity in the stock.
Here, market regulator SEBI (Securities and Exchange Board of India) has said that anchor investors need to hold their IPO investments for at least 30 days before selling. So, while Policybazaar (PB Fintech)’s IPO was oversubscribed 16.6 times, its stocks fell soon after the 30-day-lock-in period for anchors was over.
India’s IPO boom is set to continue in 2022 with companies such as LIC, Delhivery and Snapdeal expected to list. Investors could make a beeline for these shares too, but this alone doesn’t define how much wealth one could generate from the stocks. Oversubscription is a wrong metric to forecast equity returns and it’s time retail investors stop over-relying on it.
