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Here’s why your recent IPO investment turned out to be a dud

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Published: April 24, 2018 4:08:26 PM

While the Indian primary markets have been on fire with more than Rs 75,000 crore being raised in FY17-18, recent IPOs have witnessed tepid demand even as investors ditched these stocks for various reasons including concerns about valuation and weak listing.

Decoding the various reasons for muted investor demand Angel Broking says that a variety of macros that have not been too favourable.

While the Indian primary markets have been on fire with more than Rs 75,000 crore being raised in FY17-18, recent IPOs have garnered tepid demand even as investors ditched these stocks for various reasons including concerns about valuation and weak listing. Decoding the various reasons for muted investor demand ,Angel Broking says that a variety of macros that have not been too favourable.

“One of the reliable measures of market valuation is the ratio of Market Cap to GDP ratio. In the past, the whenever the Market Cap / GDP ratio has crossed 100%, the markets have seen a sharp correction. The market cap to GDP ratio has induced a degree of caution among the retail investors and the institutions,” the firm noted.

Apart from the macros, the recent IPOs have also come at stretched valuations. “As the IPO markets start becoming more robust, the valuations automatically get more stretched. Issuers and investment bankers tend to be more aggressive in their pricing and that ultimately leaves little on the table,” Angel Broking said adding that insurance IPOs like GIC Re, ICICI Pru Life, ICICI Lombard, HDFC Life, SBI Life and New India Assurance were richly priced.

Apart from stretched valuations, the post listing performance of some of the recent issues has also been below expectation. “The post listing performance has been tepid for quite some time. That has made retail investors and institutions quite wary about committing money to these issues. Also, investors are not falling into the previous IPO traps and are treading a lot more cautiously,” Angel Broking notes.

The firm also points to some unique problems encountered by HNI investors– they are unable to cover the cost of funding due to negative returns. “With listings becoming tepid, HNIs are not able to cover their cost of funding and hence have reduced their appetite for IPO funding. This has hurt the HNI appetite for IPOs substantially,” notes the report.

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