Effect of IPO on Competing Listed Firms

Posted in Finance Articles, Total Reads: 752 , Published on 09 October 2015
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While small companies are making more by going public it’s a win-win situation for them, but is it same for the investors? Would an investor gain by investing in an IPO or he should invest in competitors, there’s a need to identify the movement of share price, i.e. can an investor avail the benefits of an IPO by investing in competitor or he should invest in an IPO firm. I found that IPO announcement has a positive effect on the stock price of listed competing firms whereas in the case of post listing performance of an IPO we found that the investor would have gained if he had invested the same in the IPO rather that of a competing firm.



Image: pixabay


I have collected the data from the period January 2012 to December 2014 i.e. a total of 13 IPO’s with 33 IPO competing firms (i.e. firms with similar business model). For the purpose of research I have eliminated those companies whose market capitalization was less than 500 million. The factors like stock split, Bonus etc. were all taken into consideration for the purpose of study. These stocks were having different value so in order to scale all stocks to same level I have used share price multiplier base as 100 as of 6 months from the date of RHP for pre IPO analysis and second multiplier at the time of listing for post IPO analysis.


IPO Trends over the years

Let us first take a look at the frequency distribution of IPOs over our reference period. Our Sampling period is three years long. However, the IPO activity across this period wasn’t uniformly distributed.


It is distinctly seen here that the IPO market witnessed a slump between jan-2012 and Nov-2012. There were periods that lasted for months with less than 3 public offers. In other periods when the market was “hot” we had even witnessed multiple issues in a single month. The issue of IPO performance in “hot‟ markets is an entire research area by itself. The phase between Jun-2014 and around Oct 2014 was one of those periods, characterized by a large number of IPOs and widespread under-pricing. It is similar to a “boom” period.


IPO TIMELINE

The study sought to find the effects of IPO on competing listed firms quoted at BSE & NSE. The study has been done in 2 parts i.e. Pre IPO performance & Post IPO performance.


For the purpose of pre IPO performance- A comparison is made between six months prior to RHP date to RHP date with the same 1 week less to find out the effect of IPO announcement.


For the purpose of post IPO performance- A comparison is made between IPO competing firm with IPO.

Where: RHP- Red herring prospectus

Pre IPO analysis- Period from six months prior to RHP to RHP date.

Post IPO analysis- Period from listing date to six Months after listing date.


PRE & POST IPO ANALYSIS

BSE S&P SENSEX: In case of Pre IPO performance of stocks net effect of IPO announcement is 2% i.e. 3%-1% (33 companies) whereas in case of sectoral indices is concerned the Media, GOLD & INFRASTRUCTURE competing firms recorded a real growth of 8%, 7% & 6%. This should be noted that in India advertising expenditure to GDP is less than 1 % which is substantially lower to other developed and under developed countries. Interestingly print & T.V media contribute over 75% of the advertising spent. As Indian economy continues to develop & media reach increases, advertising expend to GDP ratio is expected to increase. Moreover the electronic media industry did not mature to a considerable extend i.e. digitization phase 1 & 2, the timely roll out of further phases will certainly benefit the industry.


SECTORAL INDICES: In case of Finance & Realty sector competing firms recorded a stagnant growth. Moreover growth on these Industry remain at 2% & 8%. A Negative growth is analysed for IPO competing firms in FMCG sector at -10%. The reason for the stagnant growth of financial services sector was due to the uneven political climate led to stagnant economic scenario thereby leading to lower infusion of capital in core industries, inflation remain high side, thereby reducing disposable income & leading to lower demand. Additionally the FY14 proved to be the most challenging year for Indian commercial vehicle, thus vehicle financiers too faced enormous challenges.


BSE S&P SENSEX: In case of Post IPO performance a comparative analysis has been done for the period of 6 months for IPO’s and their competing firms. An investor would have gain 50% more returns in an IPO than investing in competing firm whereas during the same period SENSEX movement was stagnant at 5%.


SECTORAL INDICES: For the purpose of deeper analysis we have analysed each IPO with their respective sector. There’s a general trend analysed when investor Mr A invested INR RS 100 in IPO and its competing firm, Mr A gained considerably high in case he invested in IPO in comparison to competing firm. The greatest upward movement is seen in IPO’s over competing firms of financial services, Realty & infrastructure sector at 68%, 67% & 57% whereas during this same period the respective index moved mere -3%, -9% & 5% respectively.


CONCLUSION:

India is a growing economy, this brings us more economic opportunities but also increased competition. We have tried to find out what opportunities Competing firms bring in for the competing listed firms. The results should be interpreted as indicating the markets expectation of untapped opportunities still lying in the Indian economy which new companies provide clues to for the industry as a whole.


This article has been authored by Siddharth Bhan from LBSIM



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