A lot happened in the financial markets in calendar year 2022. One of the notable events of 2022 was the long pause of 80 days in the primary markets.

Indian share markets suffered in the first half of 2022 because of the pandemic, geopolitical tensions, interest rate hikes, and supply chain disruptions.

As a result, due to dampened sentiment, too many companies were listed at a discounted price.

Considering the scenario, even the big companies that had their prospectus approved, didn’t come out with their respective offer.

Oyo, Snapdeal, and many other start-up IPOs deferred their IPO plans.

This scenario re-emphasises the belief of the greatest investor of all time – Warren Buffett. Way back in 2004, the Oracle of Omaha explained in his AGM,

“An IPO situation more closely approximates a negotiated deal. I mean, the seller decides when to come to market in most cases. And they don’t pick a time necessarily that’s good for you.

…Sometimes there will be IPOs in terrible markets, and they may come very cheap. But by and large, that is not when IPOs come. They come when the seller thinks that the market is ready for them.

2022 was indeed a rocky year for the primary market. It saw some huge loss-making IPOs.

Let us take a look at the worst performing IPOs of 2022. Continue reading to find out the lessons which can be learnt…

AGS Transact Technologies tops the list

The worst performing IPO of 2022 was AGS Transact Tech.

AGS Transact Technologies is one of India’s leading omnichannel payment solution providers. It is the second largest company in India in terms of revenue from ATM-managed services and also the largest deployer of POS terminals at petroleum outlets in India.

The company’s offer went live on 19 January 2022. The price range for the offer was Rs 166 to Rs 175. Being one of the earliest IPO of the year, AGS was largely oversubscribed by 7.8 times. On 31 January 2022, the shares were listed at par.

However, it was after that when the real problem started. The share price started to come down gradually owing to multiple factors.

On the last trading day of 2022, AGS Transact Technologies closed at Rs 63.7. In 2022, the share price lost 63.6% from its listing price.

Driven by weak financials, higher valuations, poor market sentiment and intense competition from its peers, AGS Transact Technologies was sharply beaten down on the bourses.

Which other companies followed the leader?

After AGS Transact Technologies, the next worst performing IPO in line was a new-age IT stock from the supply chain space – Delhivery.

After listing at a small premium, share price of Delhivery saw a steep fall in share price. Since its listing, the share price has slipped 31.9%.

Just like all other new age tech stocks, Delhivery also bled on the bourses in 2022. Due to poor quarterly results, the expiry of the IPO lock-in period and supply chain headwinds, the share price was driven into the ground.

The other company following the brigade was Uma Exports. Uma Exports share price lost 29.8% of its marketcap since listing. The share had listed at a premium of 18%.

Market experts anticipated the fall in share price because of stiff competition and low-profit margins.

The next line is the recently listed Abans Holdings. In 2022, the company’s share price fell by 29.6%. Apart from negative cash flows, the company operates under stiff competition, and it is heavily dependent on its 17 subsidiaries which dampened investor sentiment.

Abans Holdings was followed by the biggest IPO in the history of Indian IPOs – Life Insurance Corp (LIC).

LIC’s share price plunged 27.9% from its listing. Stiff competition, saturated business, and bureaucracy had a major impact on the insurance behemoth. These were the primary reasons why LIC share price was falling.

LIC IPO also reaffirmed the belief about how the bigger the IPOs are, the harder they fall.

Following LIC is the renewable energy arm of Inox, Inox Green Energy, which lost 26.3% of its marketcap in 2022.

These IPOs made investors lose their sleep. Let us take a lesson from the nightmares and make sure we don’t make these mistakes in 2023.

Lessons to learn from these debacles

#1 Remember, offer price does not equal to cheap price

People mostly buy in IPOs in the belief that shares are available at lower prices during an IPO. These can be sold at higher prices once they get listed on the bourses. This is one of the reasons why people invest in an IPO.

This reason holds true for strong companies with high growth potential. But this reason may not always be correct.

Never compromise on valuations and more so when it comes to loss making or tech companies.

The IPO is just the first opportunity to invest in the business. So it would be wiser to wait until you understand the long term prospects of the company better or until the stock trades at valuations that offer some margin of safety.

#2 Prospects can mislead but fundamentals show the clear picture

New age tech stocks did paint rainbows and unicorns in their draft prospects. But when these companies actually stepped into the market, all of them were taken to their fair values. Most of them saw a sharp correction.

To pick a quote from investment quotes of Joel Greenblatt,

“The market is very emotional but over time, doing something logical and systematic does work. The market eventually gets it right.”

So always make sure to test the genuineness of prospects before relying on them.

#3 Premium listing of shares does not mean a bright future for share price

Uma Exports and Zomato are prime examples of this lesson. Shares of Uma Exports were listed at a premium of 18%.

Even Zomato was listed at a whopping premium and then the share price was driven into the ground. The share price eventually comes down to its fundamental value.

#4 If the general market sentiment is weak, even good IPOs will lose money

This has to be the most obvious and a big lesson from the IPOs of 2022.

The headwinds of 2022 knocked down even the bluest of bluechip stocks. It wasn’t the company’s fault in many cases but the general market sentiment hurt them.

A good mango that is ready to be plucked and eaten will become stale and rotten if there is too much rain.

#5 Analysing competition

Many IPOs suffered last year due to intense competition.

That is why comparing the valuations of the company’s peers or the industry average is a good way to make decisions.

Investment Takeaway

IPOs can be an attractive play when four things coincide.

• Decent valuations
• Positive market sentiments
• Strong fundamentals
• Genuine prospects

2023 has begun and a lot of companies have lined up their IPO plans. There are some big IPOs to watch out for this year.

Before investing in IPOs in 2023, see if they fit the above four points.

Overall, treat an IPO as anything buy yet another stock that you could consider for long term investment.

There’s no reason to compromise on the moat, management quality, and valuations of the company.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com