Initial Public Offerings(IPOs): Riding the Bull Market

“Bull market and the IPOs are just two mountaineering friends trying to climb the peak of the economy”

Tom, as a child always loved ice cream from nearest Papa John Ice Cream shop. When Tom, at the age of 15, was introduced to the stock market by his stockbroker dad, he was flabbergasted and galvanized to follow the footsteps of his descendants. After seeing his dad trade in the stock market, Tom couldn’t wait to buy his first share of some company listed in the stock market. In 1940, when Papa john ice cream shop made its first appearance in the stock market via its Initial Public Offering (IPO), Tom made his first investment by Issuing its IPO(Initial Public Offering) of 100 shares @1 rupees per share, rather than buying shares that were already listed. 

Being a part of his childhood memory, Tom kept his share of initial investment for almost 40 years. As time passed by and new administration empowered small-scale enterprises and stock market investment inflated; Papa John’s Ice cream shop was one of the thousand enterprises whose sales skyrocketed. This made Tom’s investment into a gold mine, giving a return of more than 100% after 40 years wait.

Pretty boring story huh? Well, it is supposed to be.

In this world, where even to wait for some newly released movie to play on the television could make our lives dreaded and stalled. Why would anyone wait for 40 years to get a return of just 100% on their investment?

Well, fret not; the Current bullish market is for people like Sam.

Past 8 months were an iconic month for Indian primary markets, owing to stronger macroeconomics, continuing regulatory reforms, and an overall positive investment climate.

It gave a return of approximately above 70% on total 173 IPOs combined by the end of Jan 2018, generating a record of Rs. 77228.25 crores industry.

From New shoe manufacturer to age-banks, retail groceries to infrastructure all made its debut into this billion dollar club.

Initial Public Offering

According to our analysis, these pumps in the IPOs were mainly due to an increase of investment from FIIs and DIIs. Months like October and July were major attention point in our analysis. In October itself more than 28 new IPOs were listed, generating an overall return of 62% in just one month wherein, industries such as infrastructure and fabric industry were main highlights of the month, whereas, in July, although, only a few Initial Public Offerings were listed compared to those in October, all together, it gave a return of 189% as of January 2018 highlighted by Paper and fabric Industry.

Sam is a risk averse investor, his only goal with his portfolio is to generate greater returns as quickly as possible with low risk. So, if Sam had invested some proportion of his portfolio equally to all the new Initial Public Offerings listed in past months, he could have easily generated 64% of return by year end compared to 15-20% return he would get in Mutual Funds or 6-7% in government securities or bank deposit.


Initial Public Offering

Let’s understand how Sam can increase the return of his portfolio by investing in all new IPOs.

According to recent returns generated in Primary markets, If Sam had invested 5% of his initial investment; let’s say Rs. 100, to all the new IPOs, listed starting from July until December. He can allocate Rs.5 for first 20 non SME IPOs until November. Further, once a new IPO is announced later that month Sam can rebalance his portfolio by equally distributing his initial investment of Rs.100 to 21st IPO and so on.

According to the table above, we can see that by doing so, Sam’s initial investment of Rs.100 by the end of November were around Rs.145.7 and after rebalancing his Portfolio after investing in new IPOs his investment increased to Rs.150, giving a return of 50% as of January 2018.  

Recommended Read:- Game Theory: Lighthouse For Finance

Industrial spotlight

Paper and packaging industry were highest among our list of industries that gave greater returns, followed by fabric and clothing industry, food processing industry and infrastructure.

Such as,

AKM lace and embroidery, a fabric industry issued its share @ 25 rupees per share in the month of September gave a return of 484% as of January 2018.

Shrenik, a paper and packaging industry gave a return of 1487% as of January 2018 on the issue price of @40 per share, more than any IPOs in the fy17.   

RKEC project, an Infrastructure industry issued its share @45 per share in the month of October gave a return 209% as of January 18.

Apex Frozen, Food processing industry issued its share @175 per share in the month of October gave a return 268% as of January 18.

Bottom Line

All in all, IPOs gave more returns in a bull market in last few months compared to any other assets in the equity market. It is also an initial indicator for a booming economy.
Let’s see, if 2018 has our eye like the events that unfolded in the months of 2017.

 

 

Recommended Read:-  Is an IPO Investment Right for You?

 

Jobby Thadicaran
Economic Associate

Mudraksh and McShaw Asset Management Analytics

 

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