Should you hold on to an IPO on listing day? Lessons from stock that gained 700 percent

Source :Sify
Last Updated: Wed, Jul 7th, 2021, 20:22:51hrs
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To hold or not to has always been a question. But it should become a burning question should an investment of Rs 2.47 lakhs have a 720 percent upside in just 9 months.

On September 17, 2020 the IPO (Initial Public Offering) of a tech company called Happiest Minds priced at Rs 166 debuted on Indian stock exchanges. By end of the day, the price went up to Rs 371; a neat 123.49% rise. 9 months later, Happiest Minds has grown by a phenomenal 721.11 percent in just 9 months.

At the time of subscription, anxious investors were betting on the scope of just the listing day.

And, what did such investors who sold out their shares gain? SEBI rules limits retail IPO investments to a maximum of Rs 2 lakhs and hence retail investors are never allotted the full amount. In the case of the Happiest Minds IPO retail investors could subscribe to 13 lots or 1170 shares -- priced at Rs 1.94 lakhs.

On the day of listing shares of Happiest Minds made a profit of Rs 205 per share (traded at Rs 371 on listing day). Selling all stocks on listing day would have meant generating Rs 4.46 lakhs. Subtract the investment of Rs 1.94 lakhs and investors would have made a cool profit of nearly Rs 2.46 lakhs.

Cool amount? Making Rs 2.46 lakhs took retail investors at least ten days. There was a struggle for the allotment and finally the price had to rise on the stock exchanges.

Many did just that -- sold off all their allotted shares on listing day and laughed all the way to the bank. The scrip hit its all time high of Rs 1,247 a week ago.

An investment of 2 lakh worth IPO shares of Happiest Minds could have made you a decent 14.58 lakhs. Subtract the initial investment and the shares would have returned profits of a cool Rs 12.64 lakhs. That, if one had held onto it for just nine months.

One of the surest ways to make money in the stock market is by investing in IPOs of newly listed companies. If the company is even half as good as advertised, the share prices go up 20-40% on listing day, with the occasional ones even by 100%. That also happens because public attention is focused on shares that make their debut.

Selling on the very first day is thus a good way to make a quick buck. The question though, as the example of Happiest Minds IPO show, is it smart?

A recent study by Edelweiss' Recently Listed IPO Fund throws up some fascinating insights and says that selling on the day of listing, might be a mistake. The study notes that "Companies go public when they have earnings momentum" which means that, "Capturing this earnings momentum is what most investors miss by exiting on listing day."

Edelweiss analysed all IPOs from March 2017 to April 2020 and found that the average listing day gain for the top two quartiles of shares is 34% i.e. the top half of the best IPO during this period gained 34% on average. The same shares gained 64% within a year. This means that people who sold off the shares on listing day missed an opportunity to make 30% more gains from the same shares.

This is fascinating because the very reason why people invest in stocks is to reap profits. If I time travel a year from today, come back and tell names of ten companies whose share prices will go up 30% in a year, not one investor will blink an eye before investing in them. That's because 30% appreciation is almost four times higher than what most government schemes offer. Except on some really great upmarket period, even the best mutual funds rarely offer that appreciation.

Why do people do it then? The answer lies – as I wrote in another Sify column - in most retail investors do not understand the fundamental difference between trading and investing.

Trading is done by people who have a lot of money to play around with. Thus a small fluctuation in price means a lot of money in their pocket. 
E.g. if the price of a share of company X goes up 5% in one day, a retail investor who only had Rs 1 lakh to invest, will just make Rs 5,000 but a trader who puts in 10 times that amount would make 10 times that profit i.e. 50,000 all within a day.

Remember the cliché: money makes money?

A table of select IPOs and their returns. The last traded price is as of Close of Trading hours on 7th July 2021.

As I wrote in another column, the number of retail investors in the country has grown exponentially over a year and a half. These people who do not have deep knowledge of the markets realise from a preliminary study that IPO stocks of good companies always outperform their respective sectoral indices. This makes IPOs a sure shot way of booking profits and when they study numbers and graphs of the price rise, they see that the maximum rise these companies have, is on day one, thus they decide to sell them then.

However, if they study the graph well, like Eidelweiss did, they’ll find that yes the first day is crucial but the long tail made up of the other 364 days, adds up to almost the same rise on average, which means it makes sense to hold on to the shares if the credentials of the company are good.

This year has been excellent for IPOs with 7 out of 22 IPOs returning 50-113% over offer prices while another 10 gave 10-40% returns since listing and only four trading below their offer price. The month of July has 10 IPOs and some big names like GR Infra, Clean Science & Technology and Glenmark Life Sciences are expected to raise a huge amount.

The rest of the year will see at least 20 companies coming up with IPOs – including Zomato, Aditya Birla Sun Life AMC, and Rolex Rings already filing their IPO papers with SEBI to raise additional money.

The year is thus full of opportunities. For investors willing to make a solid buck, they need to be patient. Modify your outlook.

Instead of trading to make a quick buck, place your trades with a solid and long-lasting stand.

The IPO market can surely be an avenue to pick future multi-baggers. But you need a structured approach to your time of entry.

Thus even if a company is performing badly price-wise on day one, good credentials and fundamentals will make it a multi-bagger. You just need to give it time. Eventually with consolidation the stock price will certainly grow. And so would your profits.

Like the time of entry, optimize your exit as well by keeping an eye on the cyclicals. Selling on the day of listing in most cases, causes you to lose profits that would have accrued from holding on to them.

Investing in IPO is like an early bird getting the worm. Selling early or during the listing day means the early bird despite getting the worm, flies away with only half of it.

So be a smart bird and without much hurry, dig the ground around the worm and you’ll find there’s more where it came from.

And once in a while, you – the bird – might just get lucky enough to land your paws on a mother-load of an IPO like Happiest Minds that will just keep growing.

You will only have a sad mind if you sell such happiness early.

Satyen K Bordoloi is a scriptwriter, journalist based in Mumbai. He loves to let his pen roam the intersection of artificial intelligence, consciousness and quantum mechanics.

Disclaimer: This article is solely for information purposes. Neither Sify nor its associates are responsible for any financial damage. Readers are advised to research thoroughly and seek the personalized advice of a SEBI registered financial analyst prior to investing in stock markets. The lead image is attributed to Pexels.

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