The big Forbes India IPO litmus test

 
My stumble into business journalism coincided with a raging bull run in initial public offerings (IPOs) in the early ’90s. It was a surreal period, with public issue press conferences of companies of all hues—including a few that had yet to start making something, anything; the fund-raising would be to build a factory or a product that would never see daylight.

It wasn’t uncommon, either, for newspersons to be hard at it, attending a string of IPO press conferences from early afternoon to late evening, with the inevitable ‘one-on-ones’ thrown in. I remember the markets editor dispatching me for one such meeting with the founder of a small-town maker of innerwear (it wasn’t exactly called that then), armed with financial jargon like RONW, ROCE and current and quick ratios. I, of course, was a stranger to this lingo, but it didn’t help when the founder himself had little clue about the existence of such numbers.

Close to 4,000 IPOs are estimated to have flooded Dalal Street between 1992 and 1996. Most of these were dubious, in an era when fly-by-night was a common phrase in business media.

Yet, a few quality IPOs have spectacularly stood the test of time. Consider Infosys, which offered shares to the public at just under ₹100 in 1993. A 2022 IIFL Securities blog pegged the compound annual growth of the Infosys stock at almost 40 percent over 29 years; an initial ₹9,500 investment was worth ₹15.63 crore in 2022.

Infosys may be the swallow that doesn’t make a summer. Yet, public issues have come a long way since the ’90s. Regulatory barriers have been raised and there are research houses today that scan IPO documents with a toothcomb. So does that mean quality has kept pace with quantity?

I posed this question to Forbes India’s equities’ eager beaver Nasrin Sultana. She came back with reams of data of over 200 companies that listed over the past five years. Her conclusion? If you’re looking for ‘listing pops’—first-day IPO gains—it’s been quite a party. But if you’re looking for the next Infosys or HDFC Bank, it’s going to be a slightly harder grind.

If every IPO cycle throws up winners, it also comes with its distinctive bugbears. Overpricing is clear one of them this time around.

As Pranav Haldea, managing director of Prime Database Group, Forbes India’s data partner in this IPO special, writes on : “Investors would do well to remember that even a great company at an expensive valuation makes for a bad investment.”

Sultana’s analysis suggests that much of the IPO pack struggled amid market volatility to deliver consistent quality earnings and in the process eroded investor wealth.

A handful of IPOs from this lot have stood the test of five years. If every IPO season has its flavour, this time around it is defence. Manu Balachandran analyses the prospects of three such companies that recently went public. As Balachandran writes in his piece on Paras Defence and Space Technologies, the government’s push towards indigenisation has provided the sector with a leg up.

On the cover is a company from a sector that’s virtually recession-proof: Food. In 2020, a then-43-year-old company that began by selling ice creams, cakes and puddings in Ludhiana joined the likes of Nestle and Britannia on the stock exchanges. As Rajiv Singh writes, the dream run of Mrs Bector Food Specialities continues—in both the consumer and stock markets. For more on what makes founder Rajni Bector tick, ‘Bread Winner’ on page 28 is a must read.