Investors See Strong Returns from Low-Priced Fresh IPOs in 2023

Investors who purchased initial public offerings (IPOs) in 2023 at relatively modest valuations and retained their shares have generally enjoyed significant returns. This trend is especially notable for IPOs where the proceeds primarily funded company growth rather than enabling existing shareholders to exit.

Data from Capitaline and Prime Database covering 38 mainboard IPOs listed between January and August with reported earnings reveals that the 12 companies priced below 20 times their earnings per share provided a median return of 45.4 percent as of September 29. This compares favorably against a median 33 percent return for all IPOs in the sample. Notably, much of the upside occurred after the initial trading day. These shares debuted at a modest median premium of 5.3 percent over their offer price but subsequently climbed a median 35.2 percent from their closing price on the listing day.

Most of these lower-priced IPOs, nine out of the twelve, raised capital through fresh issuance rather than offer for sale (OFS) transactions. These fresh issue IPOs yielded an even higher median return of 51.3 percent, suggesting that investors benefit more when IPO funds are directed toward company expansion.

By contrast, IPOs with pricier valuations between 30 and 50 times earnings produced higher median returns of 58.8 percent. However, these gains were largely front-loaded, with shares listing at a median premium of 23.2 percent but only gaining 10.5 percent afterward. This segment was dominated by OFS-heavy deals, where 81.8 percent of the ₹22,998 crore raised came from existing shareholders selling their stakes.

Among this pricier group, Indo-MIM and Shadowfax Technologies stood out with significant price surges of 157.5 percent and 126.4 percent above their respective offer prices. On the other hand, SBI Funds Management and Fractal Analytics traded below their offer prices, reflecting more mixed investor sentiment. Indo-MIM’s offering was 87 percent OFS, while SBI Funds Management’s was entirely OFS, indicating a pure exit of private investors.

Pure OFS IPOs in the lower valuation band, such as Central Mine Planning & Design Institute, CMR Green Technologies, and Hexagon Nutrition, returned median gains of 24.1 percent. Abhay Agarwal, founder and fund manager at Piper Serica, explained that IPOs without valuation multiples that leave value for public investors tend to be fresh capital raises. In contrast, pure OFS deals tend to seek the highest possible valuation, leaving less potential upside.

High price-to-earnings (P/E) multiples in IPOs often reflect companies with rapid growth trajectories. Agarwal cited Indo-MIM as an example: despite its elevated P/E ratio, its strong earnings growth justified the valuation when considering its price-earnings-to-growth ratio.

On the other end of the spectrum, IPOs priced above 100 times earnings showed the weakest median returns at 20.8 percent. Leap India, priced at 133.2 times earnings, was trading 13.5 percent below its offer price, highlighting investor caution towards extremely high valuations.

Among the most successful lower-priced IPOs were Technocraft Ventures, Xtranet Technologies, and Onemi Technology, which surged over 100 percent above their offer prices and were mainly fresh capital raises. However, Alpine Texworld, despite being a fresh issue priced at 18.7 times earnings, was trading 53.4 percent below its offer price, demonstrating that not all low-priced IPOs guarantee positive outcomes.

Market analysts caution investors to scrutinize earnings trajectories closely, especially when a company reports a sudden spike in profits in the year preceding its IPO. Such sharp increases may sometimes stem from accounting maneuvers intended to make the IPO appear more attractive. An analyst pointed out that companies that show steady earnings growth over several years generally offer more reliable investment prospects than those with abrupt profit jumps.

Kranthi Bathini, equity strategist at WealthMills Securities, emphasized that stock prices ultimately reflect earnings performance. While valuations may become frothy and diverge from fundamentals in the short or medium term, market forces typically correct these imbalances over time.

These insights into IPO pricing and performance highlight the importance for investors to consider valuation multiples in conjunction with capital use and earnings growth. Fresh issue IPOs priced reasonably relative to earnings appear to deliver better long-term returns, while OFS-heavy offerings and those with extremely high P/E multiples present more mixed prospects.