Research reveals that initial public offerings priced below 20 times earnings, especially those raising new capital, have outperformed more expensive and offer-for-sale issues, sending a positive signal to investors.
This year’s cheapest initial public offerings have turned out to be the best hunting ground for investors who were willing to stay the course, with the strongest outcomes appearing in issues that raised fresh capital for the company rather than simply cashing out existing shareholders. Business Standard reported that, among 38 mainboard IPOs listed between January and August with reported earnings, the 12 priced at less than 20 times earnings had returned a median 45.4% by 29 September, compared with 33% for the full set.
The gains were not driven mainly by the first day of trading. According to Capitaline and Prime Database data cited by the paper, the lower-priced offerings opened with only a modest median premium of 5.3%, but then climbed a further 35.2% from their listing-day close. Nine of the 12 raised mostly fresh capital, and those issues delivered a median return of 51.3%, suggesting that investors have been more generously rewarded when the proceeds are tied to growth rather than seller exits.
That pattern was less obvious in the pricier end of the market. Issues valued at 30 to 50 times earnings produced a stronger median total gain of 58.8%, but most of that came at the debut, when they listed at a median premium of 23.2%. Since then, they have added only 10.5%, and the band was heavily skewed towards offer-for-sale structures, with existing shareholders accounting for 81.8% of the ₹22,998 crore raised. Indo-MIM and Shadowfax Technologies were among the standout gainers, while SBI Funds Management and Fractal Analytics have fallen below their offer prices.
The picture was weaker still among pure offer-for-sale listings. Central Mine Planning & Design Institute, CMR Green Technologies and Hexagon Nutrition returned a median 24.1%, even though their pricing ranged from 14.1 to 19 times earnings. Abhay Agarwal, founder and fund manager at Piper Serica, told Business Standard that OFS-heavy flotations tend to leave less room for upside because selling shareholders and private owners generally seek the highest possible valuation. He added that high growth can still justify a steep multiple if earnings expansion is strong enough to support it.
The sharpest warning sign, analysts said, is a sudden leap in profitability just before a listing. One market participant told the paper that companies can appear cheap on a price-to-earnings basis if last year’s profits were inflated by accounting choices or unusually strong one-off results. Kranthi Bathini, equity strategist at WealthMills Securities, said stock prices ultimately follow earnings, even if valuations become frothy in the short run. That view helps explain why some of the most expensive issues, priced above 100 times earnings, have posted the weakest median return of 20.8%. Leap India, priced at 133.2 times earnings, is trading below its offer price, while among the cheaper issues Technocraft Ventures, Xtranet Technologies and Onemi Technology have delivered some of the strongest post-listing gains.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
