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Three trends in the Indian IPO market
The Reserve Bank of India manages the monetary policy and regulates banks and non-banking finance companies. It also regularly shares a lot of knowledge that could be useful for those interested in financial markets. Awadesh Kumar Shukla and Tara Shankar Shaw from the Reserve Bank of India (RBI) conducted a study on the Indian IPO market. The study, named "Operating Performance of Initial Public Offering Firms after Issue in India – A Revisit", researched 413 non-financial firms that floated their IPO between April 1, 2000, and March 31, 2011. The data used in the study included three-year operating performance of the listed entities post IPO.
Based on the analysis, the authors came out with a new set of findings:
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Asset base:
Very often, the money raised through the IPO route is used for expanding the company business. This requires heavy investment in assets like machinery, factory, warehouse, and office space. Hence, companies tend to increase capital expenditure (capex) and asset base significantly post IPO. Nearly 250 out of the 285 companies used in the RBI study indicated capex as the main objective of their IPO.
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Asset-based ratio:
The return on asset (ROA) shows a declining trend pt rise later. The cause is identified by a research paper published by Evgeny Lyandres, Le Sun and Lu Zhang in 2006. They believe that companies invest aggressively post IPO without considering efficiency and this leads to lower profits. The net operating cash flow to total assets (RCFA) is another asset-based ratio. It takes into account the changes in capex and working capital. The RCFA declines two years continuously after the IPO but turns positive in the third year. This is the result of high capex during the two years' post the IPO. The findings on RCFA made by Awadesh Shukla and Tara Shaw are opposite to those made by Bharat A. Jain and Omesh Kini in a study in 1994.
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Sales-based ratio:
ROA and RCFA take into account historic value of assets. Some of these assets may not be used in company operations and are considered as non-operating. The sales-based ratios can be used to measure the company performance, according to a research paper published by Barber and Lyon in 1996. Company sales rise along with the rise in asset base post IPO. The study found that the sales-based ratio like return on sales does not change much after the IPO. Sales-based ratios must be used for checking operating performance and comparison as they are comparatively steady.
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5181.69
Nearly 153 companies raised Rs 75,400 crore ($11.6 billion) through IPOs in 2017. The S&P BSE IPO Index keeps a track about the price performance of new securities up to 2 years post listing on the BSE. It measures the gain in investors' wealth. The index touched its life-time high of 5181.69 on January 15, 2018.
