While the Indian stock markets have seen some of the most stunning success stories of IPOs over the years, there have also been disheartening failure stories. An Initial Public Offering (IPO) is an extremely important phase in any company’s life when it goes public. It helps raise funds from the public to expand and enhance the business. It also provides an opportunity for the public to be part of a company at the start of its journey in the public market. However, not every company going public delivers the expected results.
In this article, we will focus on a few notable case studies of successful and failed IPOs in India. Also, try to identify the key reasons behind their outcomes and provide actionable insights for further investments.
India’s Successful IPOs
1. Zomato (2021)
Zomato went public with its IPO in July 2021, which marks one of India’s first major startup listings. It raised ₹9,375 crore and was oversubscribed 38 times.
The following factors resulted in its success:
- Strong Brand Recognition: Zomato is a market leader in the food delivery business, so it attracted not only retail investors but also institutional investors.
- Market Potential: For investors, the booming food-tech sector presented high-growth potential.
- Backed by Global Investors: Pre-IPO investments from players like Info Edge and Ant Financial boosted credibility.
Despite a lackluster track record of profitability, its long-term growth story did resonate well with the investors and that resulted in a 53% gain on the listing day.
2. LIC (2022)
The IPO of Life Insurance Corporation of India was one of the largest in Indian history and raised ₹21,000 crores. It was a strategic divestment by the government, which underscores:
- Market Dominance: LIC’s deep penetration in the life insurance market instilled confidence among the investors.
- Government Support: The credibility of a state-backed entity attracted both retail and policyholder investors. While LIC’s stock proved volatile after listing, huge subscription numbers indicated its huge appeal.
3. Dmart (2017)
Avenue Supermarts, widely known as DMart, launched its IPO in 2017 at Rs 299 per share, planning to raise Rs 1,870 from the IPO. The IPO was oversubscribed nearly 105 times.
The following factors contributed to its success.
- Strong Foundation: DMart had a proven business model with consistent profitability.
- Business Stability: Low debt levels and efficient operations.
- Trust in Promoter: Widespread confidence of retail investors in DMart’s founder RadhaKishan Damani.
Performance
The stock was listed at Rs 604, a 102% premium, and has since delivered a strong performance, thus making it a favorite among long-term investors.
4. Tata Consultancy Services (TCS, 2004)
TCS(Tata Consultancy Services), part of the TATA group, launched its IPO in 2004 at a price of Rs 850 per share and planned to raise Rs. 5420 crore from the IPO. The IPO was subscribed 7.7 times, reflecting a strong demand from investors.
The following factors contributed to its success.
- Established Brand: TCS was already an established brand in IT services, with a strong reputation in domestic and global markets.
- Robust Financials: The company registered a consistent growth in revenue and profits, making it attractive for investment.
- Global Presence: TCS’s operations in different countries provided it with diversification and growth potential.
Performance
TCS was listed at Rs 1076 a 27% premium. The company has since delivered exceptional long-term returns and remains one of India’s most valuable companies.
Failed IPOs in India
1. Paytm (2021)
Although Paytm’s IPO raised ₹18,300 crore it soon became notorious for its disastrous post-listing performance as it saw a 27% drop on debut. The main reasons for failure were:
- Overvaluation: Investors seriously doubted its heavy valuation even though it had huge losses.
- Complex Business Model: Paytm diversified across multiple verticals creating skepticism about what was its core focus.
- Lack of Profitable Track Record: Negative cash flows scared away institutional investors.
This case illustrated that valuations must complement potential growth.
2. Sterling and Wilson Solar, 2019
This IPO faced post-listing challenges: it dropped by 29% on debut due to:
- Corporate Governance Issues: The promoters did not repay the inter-company loans as promised, jolting investor trust.
- High Debt Levels: The high debt level of the company added to financial pressure, which was a red flag.
Investors learned a valuable lesson: due diligence on promoter credibility is key while investing in an IPO.
3. Reliance Power (2008)
Reliance Power IPO was launched in 2008 and was one of the largest IPOs in India at that time. The IPO raised Rs 11563 crore and was oversubscribed 73 times. The stock however performed poorly post-listing.
The Key Reasons for its Failure:
- Overhype: Due to the heavy marketing of the IPO, it created unrealistically high expectations.
- Over-Valuation: As compared to its peers the stock was seen as over-valued.
- Regulatory and operational issues: Delays in power projects led to a lack of confidence in the company’s growth prospects.
Performance
The Reliance Power stock was listed at ₹450 but quickly fell, eroding investor wealth. Today, Reliance Power IPO serves as a reminder of the risks associated with over-hyped IPOs.
4. Future Retail (2016)
Future Retail, well known for its retail chains Big Bazaar and Food Bazaar launched its IPO in 2016 and planned to raise Rs 1600 crore. The stock however faced significant challenges post-listing.
Key Reasons for Failure:
- Financial Instability: High debt levels and low profitability deterred investors.
- Increased Competition: Fierce competition from e-commerce giants like Amazon and Flipkart further impacted its market position.
- Lack of Strategic Direction: Investors perceived the company’s growth strategy as weak.
Performance
Post-listing the company struggled due to declining market share and financial issues. The company eventually had to face insolvency proceedings in 2021.
Key Drivers of Success and Failure of IPOs
Fundamentals
Companies with a strong revenue model, competitive advantage, and transparent profitability path do better. Examples – Zomato, succeeded because it rode the boom in the food delivery sector, while Paytm failed as it lacked a profitable track record.
Valuation
Valuations close to market expectations would instill confidence. A high valuation would attract skepticism, as in the case of Paytm. LIC struck a sweet balance and got its pricing right, attracting retail investors.
Promoter Genuineness
Reliable promoters build investor trust. The Sterling and Wilson Solar debacle exemplified how broken promises do away with credibility.
Market Timing
Market sentiment and the overall economic conditions are influential external factors that impact IPOs.
Clear Use of Funds
Investors prefer IPOs where fund (IPO proceeds) utilization is aligned with growth strategies. LIC and Zomato have clearly specified how the funds will be used, which increases investor confidence.
Lessons for Future Investments
For Companies:
- Prepare for Transparent Communication: Companies must have clear disclosures about their financials, risks, and objectives. This will foster trust.
- Focus on Core Strengths: Concentration on core competencies is paramount. Avoiding over-diversification would dilute the brand value.
- Balance Valuation with Growth: Reasonable pricing of the IPO will make it more accessible to different groups of investors and lower post-listing volatility.
For Investors:
- Do Thorough Research: Analyze the company’s financials, business model, and sectoral growth prospects.
- Assessing Risks: Understand the risks associated with over-priced IPOs and companies with unclear business models.
- Monitor Market Conditions: Evaluate macroeconomic factors influencing market sentiment, which will impact the performance of the IPO.
Conclusion – Successful and Failed IPOs
The success and failures of IPOs provide a valuable lesson to investors. Successful IPOs highlight the importance of a proven business model, strong financial performance, and trust in management. On the other hand, failed IPOs underscore the importance of financial stability, clear strategic vision, and understanding of market conditions.
The above successful and failed IPOs emphasize that although IPOs provide growth opportunities, they also carry risks. It is, therefore, incumbent on the investors to conduct thorough due diligence, like assessing the company’s financial health, competitive positioning, and broader industry trends. It is equally important to keep an eye on regulatory changes as they can significantly impact an IPO’s performance in the long run.
By learning from both successful and failed IPOs, investors can make informed decisions and avoid the pitfalls of overhyped offerings.
Happy IPO Investing!
Related Information & Articles
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8 IPO Investment Strategies: Long-Term Growth
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