It is no exaggeration that most investment decisions were influenced by the recent rally in the stock market, not by the fundamentals of companies
The economy contracted in 2020-21 owing to the nationwide pandemic lockdown last year and resulted in a higher unemployment rate in both the formal and informal sectors.However, interestingly, during the same period, there was an unprecedented surge in trading and investment in the stock market.
Both benchmark Sensex and Nifty clocked in their highs during the pandemic period rising from the low that they hit in March 2020. The new entrants are retail investors with their participation booming amid the pandemic situation. According to the data from the Securities and Exchange Board of India (SEBI), the new Demat accounts rose to an all-time high of 10.7 million between April 2020 and January 2021. The recent data from the National Stock Exchange (NSE) shows that retail participation in the stock market's equity division constitutes 45 per cent of trading turnover.
What was the reason behind such an influx of these new retail investors (a major chunk is the GenZ and millennials) in the stock market? Of course, the influence of Warren Buffet, Rakesh Jhunjhunwala, or the movies like The Wolf of Wall Street and Harshad Mehta series acted as catalysts but the major source of ignition arose from income uncertainty due to a significant number of job losses. Many opened their Demat accounts during the pandemic, reminding us of the Warren Buffet quote that "If your salary is your only source of income, you are one step away from poverty".The ease of opening these accounts also boosted the process. Discount brokerage firms like Zerodha, Upstox, etc., helped the emerging investors to open the accounts in a few hours. The investment awareness campaigns also promoted the account opening with different sharebrokers.
Another reason for such a high influx is the increase in liquidity in the market because of Foreign Institutional Investors (FIIs). After withdrawing about $6.4 billion in the March 2020 quarter, FIIs re-entered the Indian equity markets in the June and September 2020 quarters. The value of FII investments in Indian equities reached $450 billion at the end of the third quarter of 2020. At this point the overall spending on consumables was low and the additional inflow of foreign currency increased the liquidity in the market. So, for the middle-income group, investment in stocks was an attractive option.
It is no exaggeration that most of the investment decisions were influenced by the recent rally in the stock market and not driven by the fundamentals of the companies. The surge in the stock price of Bombay Oxygen Investments Ltd (BOM) was one of the prime examples of herding behaviour in the stock market. The price of BOM skyrocketed when there was high demand for medical oxygen across the country but the fun fact was that BOM was just a chemical company, not a producer of oxygen.
Companies aiming to raise finance through Initial Public Offerings (IPO) took advantage of the increase in the number of account holders in the stock market. This is because the number of active investors increases the probability of bidding which would further improve the probability of oversubscription, and eventually, the listing will occur at the highest price. From the new investors' point of view, an IPO is a faster profit-making option and requires much less research for bidding. Only the general market sentiment is enough to anticipate listing gains. The phenomenal participation of retail investors led to almost every IPO getting oversubscribed from the retail category. During the pandemic period, a large number of Indian companies raised ?20,350 crore and ?31,265 crore in financial years 2020 and 2021, respectively, through IPOs.
The trending craze of IPOs was peculiar last year (the same trend is following this year though). From a general, preconceived notion, we can justify our rationale that those companies with good financial records and future growth opportunities should get impressive responses from the primary market. But if we look at recent IPO data, the retail subscription was almost 68 times for a loss-making company like Burger King or BBQ Nations (with 13 times oversubscription), and the same was only about 3.6 times for Indian Railway Finance Corporation (IRFC) thatmakes profit year-on-year and is expected to improve its profitability further. Interestingly, even after 1.5 years, IRFC shares have not picked up in the secondary market whereas the RailTel IPO, despite being a government-backed company, performed quite well both in the primary and the secondary markets.
It is very difficult to formulate any strategy for the companies launching an IPO, as decrypting the mindset of the retail investors is almost impossible. But each IPO was the talk of the town every time. Maybe because the new investors are very tech-savvy and they always kept an eye on the review and financial analysis of these IPOs through different mediums. Hence, the overall response from the primary market was beneficial for the issuing companies.
But what about the gain of the investors (the retail investors, as they are the prime focus of the discussion)? Well, it was a win-win situation for both the investors and the companies. Talking about the listing gains, 29 out of 40 companies (excluding the recent IPOs that are not listed yet) gave an average of 42 per cent returns. And all the 11 companies that couldnot generate listing gains are already giving returns (as of July 15, 2021). This means every listing of last year gave at least some returns (the minimum profit figure is 29 per cent; SBI Cards). The one-year return from the IPOs will be difficult to measure, as only one company came up with an IPO in the first six months of last year. So, if we consider last year's IPOs, the average return is 202 per cent. But it is unfair to assume everyone got the allotment of all these IPOs. So, from the listing price, if we calculate the return, it is roughly 118 per cent.
An interesting inference that can be drawn is that last year those companies which were listed with a higher price than the IPO price are all generating positive returns as of July 16,2021. So, from a value investing point of view, investors feel, these companies are a good bet for them in the long term.
However, there is a propensity for retail investors who get IPO allotments to square off the position on the listing day itself with a moderate listing gain. With news spreading of some supernatural listing gains of some companies, for example,Indigo Paints, which was listed with 109 per cent return, or Happiest Minds Technologies, which was listed with 123 per cent returns, potential investors get the motivation to enter the equity market. At the same time, some active investors tend to bid furiously for the next IPO without proper analysis. The first outcome is good for the economy. But the second scenario is detrimental to investors' mindset and leads to a gambling outlook towards the IPOs. So, the education on personal financing and the stock market, interpretation of the balance sheets of companies for fundamental analysis, and understanding the due diligence of companies across sectors is something that the retail investors must know thoroughly.
(Arnab Sarkar is PGDM Student, Great Lakes Institute of Management, Chennai. Ranjitha Ajay is Assistant Professor of Finance at GLIM, Chennai. The views expressed are personal.)
