Promoters? decision to enter the primary market and the valuation they ask for inevitably gets influenced by the underlying market trend. A study of IPOs of 2009 found that only 15% of companies that came with IPOs reported earnings which were higher than that reported at the time of listing. This is before adjusting for overall market movements during the two period under consideration ? that is latest annual earnings and those at the time of coming with an IPO.
After such adjustments, there were as few as only two companies which managed to sustain a premium over the market adjusted earnings expectation. This to some extent implies that investors need to look beyond the general yardsticks of earnings of a company as there is a possibility of earnings getting padded at the time of IPO to boost valuations and attract investors.
The sample set of our study consisted of 21 companies that hit the primary market in 2009; half of which belonged to IT and power sectors.
On sorting these companies based on the average monthly return (%) delivered since the time of their listing, about two third of these companies showed sustained positive returns during the period under consideration.
While 14 companies passed this criterion, there were only about 8 companies which gave dividend returns (calculated over the adjusted offer price) equal or greater than 1% in FY10.
Three stocks that managed to pass the above two performance measures included Edserve Softsystems, Oil India and DBCorp. Further, we calculated the Sensex adjusted earnings of these companies as of September 2010 by considering earnings proclaimed at the time of their respective listing and adjusting them to the market’s movement since the listings of these stocks.
Only two companies from the list ? Oil India and D B Corp ? managed to overcome this final scrutiny. This exercise points to the need for investors to expand the number of parameters used to analysing IPOs which typically consists of peer comparison in terms of valuation offered. Additionally, it may be prudent to give importance to the sector to which the company belongs, its business model and in turn its growth prospects, which will ultimately drive its valuations over the long term.