Earnings shock awaits new IPO investors burnt by listing losses

• Eight out of 14 IPOs listed in the Indian stock market in 2022 have given negative returns to investors.
• Adani Group company Adani Wilmar is the only outlier that more than doubled investors' money in five months of 2022.
• Analysts say apart from weak market sentiment, high valuations of many IPOs despite poor financial performance is hurting investor appetite

At the fag end of this year’s IPO season, investors might learn a valuable lesson – profiting off listing debuts is not as easy as it looks. All the 14 initial public offers (IPO) which called for bids this year were fully subscribed with substantial interest from retail investors – irrespective of the quality of companies that went public.

Eight of the 14 IPOs in 2022 have given negative returns so far – thanks to RBI’s surprise move to raise interest rates, global outlook, FIIs fleeing Indian markets and of course rising inflation that’s hurting consumer sentiment and margins.

The only ‘good’ surprises being Adani Wilmar and Veranda Learning Solutions – but they were listed way before the market crash. Even a behemoth like LIC which became the fifth most valuable company in India after listing – fell after its public debut – suggesting that the days of ‘easy listing gains’ are over.
(Source: BSE)

More pain in the equity market ahead
For these recently listed entities, analysts see more pain in the coming months. Since some of the companies that went public are yet to make profits, their earnings in the next few months might disappoint the markets and investors, even further.

“FIIs, DIIs are uncertain about the earnings of IPO bound or other unlisted companies due to various macro factors playing out. Earnings in the upcoming quarters will be the turning point for market conditions for IPO and markets in general,” said Manoj Dalmia, founder and director at Proficient equities Private.

The newly listed companies like LIC, Delhivery and Veranda Learning Solutions have depressed investor sentiment even further as they reported their March quarter earnings.

LIC’s net profit fell 17% to ₹2,409 crore in the March quarter. Delhivery and Veranda Learning Solutions too reported losses of ₹119 crore and ₹20 crore respectively.

Again, Adani Wilmar was an exception. Its profit surged 40% during the March quarter due to the rise in edible oil prices, as an after-effect of the Russia-Ukraine war. But this very news might be bad for most other companies across the sector – which means fewer funds, inflated raw material prices and more.

“The markets are slightly weak due to increasing inflation, global uncertainty of rate hikes, and war between Russia and Ukraine. Even VC fundings have narrowed in startups and already layoffs are being seen in gaming and education sectors,” added Dalmia.

The fund crunch is also affecting the valuations of companies with good fundamentals; but those IPOs which were priced high will continue to face even more pain once earnings are announced.

Yet, there is one silver lining that the global economy itself might improve for the better and bring back foreign funds and domestic sentiment which can improve the outlook of these stocks for the better.

“My sense is things from here on should improve as there is still domestic capital to be deployed and hopefully FIIs also at some point will do reallocation and come back in the market,” said Neha Khanna, director at ValPro.

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