IPOs in H1-FY23 did much better than expected

If you are an IPO buff, you have a lot of reasons to complain about. You can complain about very few IPOs in the first half of FY23. You would obviously be unhappy that the LIC IPO (the largest IPO ever) is trading at a discount. However, one must understand that the first half of FY23 was a reality check for the IPO markets. After the frenetic digital assault on IPO markets in 2021, the relative silence in H1-FY23 is not only eerie, but also welcome.

Macro IPO picture for H1-FY23

The total IPO collections in the first half of FY23 stood at Rs36,218 crore across 15 IPOs. That is less than a third of the amount raised in FY22 and sharply lower compared to Rs51,970 crore raised in the first half of FY22. If you take out the LIC and Delhivery IPO, the other 13 IPOs in the first half don’t even add up to Rs10,000 crore. But the good news is in the subscription. Against the IPO target amount of Rs36,218 raised in the first half, total bids were received for Rs294,263 crore. That shows 8.12 times investors interest, which is a very healthy level. So there are positive takeaways for the second half of FY23.

How does the IPO performance look. If you look at the market value of the Rs36,218 crore raised in the first half, it is actually lower at Rs34,345 crore. That is a value loss of Rs1,874 crore in the first half in IPOs overall. However, the IPO of LIC alone destroyed value worth Rs7,073 crore so the other 14 IPOs put together created serious wealth for investors. How about the number of profitable IPOs and the returns on these IPOs?

That presents a more encouraging and also a more realistic picture. If you look at the 15 IPOs in H1-FY23, a total of 13 IPOs are trading above issue price with only LIC and Tamilnad Mercantile Bank IPO trading below issue price. The arithmetic average of returns of these 15 issues is an impressive 32.11% in H1-FY23, even after factoring in deeply negative returns by LIC. One argument against arithmetic average is that it is vulnerable to deeply positive and deeply negative returns. Instead, if we look at the median returns for all the 15 IPOs, it is still an impressive 24.91%. The IPO story is certainly something to write home about.

Did size of the IPO determine post listing returns in H1-FY23?

That is an interesting question. The table below captures the trend, whether there was any correlation between the size of the IPO and the returns it gave post-listing.

Data Source: NSE

There is a propensity to overreact to LIC IPO and conclude that returns are negative on large IPOs. After all, the LIC IPO size was Rs21,008 crore and the current market price is 33.7% below the IPO price. However, if you look at the other 4 IPOs with issue size above Rs1,000 crore i.e. Delhivery, Rainbow Hospitals, Paradeep Phosphates and Campus Activewear; they have all done very well. So it is not just about size but more about how attractively the IPO is priced and how much it leaves on the table. We can also ratify with the fact that all the small IPOs under Rs500 crore have also done very well post listing.

Did oversubscription determine post listing performance?

Did the extent of subscription to the IPO, influence post-listing returns on the IPO. The table below captures the trend as to whether there was any correlation between the extent of subscription of the IPO and the returns it gave post listing.

Data Source: NSE

Let us look at the only 2 issues that have given negative returns post listing in H1-FY23 viz. LIC and TMB. Both got subscriptions of less than 3 times, so there appears to be some connection between extent of subscription and post listing performance. Let us now turn to the top subscription IPOs. The top 5 in terms of subscription have also given strong positive returns post listing. However, if you look closer, subscription level alone it not enough to generate post-listing performance. For instance, Dreamfolks with 56.68 times subscription has given just 11.81% returns post listing while Ethos Ltd with 1.04 times subscription has also given 11.26% post-listing returns. Delhivery and Prudent Corporate got subscribed less than 2 times but have given steady returns post listing. A company like Paradeep Phosphates, which got subscribed just 1.75 times in the IPO is up 58.8% since the listing. The moral of the story is that while subscription levels are important, they are not a determinant of post-listing performance beyond a point.

Get set for a more exciting H2-FY23

With encouraging signals from H1-FY23 and much of global hawkishness to be done and dusted in 2022, the H2-FY23 promises robust IPO action. There are 71 companies with IPO approvals worth Rs105,000 crore set to expire in the second half of FY23. It remains to be seen how many pursue the IPO route. For instance, big names like PharmEasy, Macleods Pharma, MobiKwik and GoAir have shelved IPO plans for now. If you cancel the LIC effect, the first half was actually quite encouraging. That may induce a companies to accelerate their IPO plans for H2-FY23.