IPOs overwhelm but blue-chips underperform in Indian stock market

The Indian Stock Market is riding two dangerous trends, currently, that make it look more like a gambling den than a market for investing in companies that deliver growth. The first trend is that 99.6% of market volume is contributed by Derivatives, which is trading in Future and Options. The second trend is the overwhelming response to IPOs (initial public offering) in the backdrop of falling stock prices of Blue Chip companies.

Retail Investors fall head over heels to apply for IPO subscriptions

It seems beyond logic to witness the stock investors valuing untested companies with unprecedented enthusiasm while the Blue Chip stocks that have proven their mettle in the market are failing to deliver growth in the portfolio.

Take, for instance, the case of the five mainboard IPOs who launched their issues last week to raise ₹7,377 crore. However, cumulatively these IPOs got applications worth approximately ₹3.3 lakh crore, or almost 45 times more than what these companies intended to raise from the market. This is an event, unheard of, in the history of the Indian Capital Market.

Tata Technology IPO garnered 73.5 lakh applications, a record that surpassed all previous mega IPOs like LIC, Paytm, Coal India, Reliance Power etc. The Issue size was ₹3,042 crore and IPO received 69.43 times subscription showing investors are intended to put ₹2.12 lakh crore (application amount) in the IPO. Also, IREDA with an Issue size of ₹2,150 crore subscribed 38.8 times (application amount equals approx. ₹83,500 crore) and Gandhar Oil with an Issue size of ₹500 crore subscribed 64.07 times (application amount approximately ₹32,000 crore). Flair Pen with an Issue size of ₹593 crore received application amount worth ₹28,000 crore through 46.8 times subscription while Fed Bank Fina with issue size of ₹1,100 crore got 2.2x subscription with application amount of ₹2,200 crore.

Retail Investors indifferent to Blue-Chip Stocks

Looking at the investors' interest in these IPOs one may assume that the investors would also be inclined to invest in Blue Chip companies that have delivered up to the expectations of the market multiple times in the past. However, here is where the dichotomy of investor psychology or investment strategy gets blatantly illogical.

It is baffling that when IPOs are receiving record applications, the secondary market remains staunchly despondent. In fact, most of the Blue Chip Nifty 50 companies have lost money for investors in last two years. From November 2021 till Friday (November 25) closing Bajaj Finance lost 9.46% while Divis Lab gave negative 28.77% return. Other prominent companies that gave negative returns in last two years are TCS (-3.31%), Kotak Bank (-18.03%), HDFC Bank (-5.54%), Infosys (-20.54%), Tata Steel (-8.26%).    

Nifty Heavyweight like Reliance Industries is currently trading at 9% lower than its 104 week high (2 years) while TCS and HDFC Bank are trading -14.49% and - 12.83% respectively from its two year high.

How retail investors may influence the stock market:

Stock prices of these companies suggest that the Indian Retail crowd is gung-ho about IPOs but are unappreciative of the blue-chip listed companies. It may be due to the fact that an IPO is usually launched amidst huge marketing antics while companies that have gone public already rarely do anything just to attract new investors. Or, maybe, the average retail investor is just not educated enough to invest wisely in the stock market. Or retail investors are probably gambling on quickly exiting an IPO after premium listing. The conventional wisdom defying cause of such investor behaviour remains quite elusive at this point.

However, if the trend of Derivative volume encompassing 99.6% of Indian Stock market volume is juxtaposed with overwhelming IPO applications and underperforming Blue-chip stocks, it would seem that the average investor is entering the market with the recklessness of a gambler rather than the caution of an investor.  

The trends are alarming for the Indian Stock Market as rash strategies of a large number of investors influenced by PR and marketing gimmicks can disrupt the logic of fundamental analysis with which the attractiveness of a company’s stock should be evaluated. Because, as the popular saying goes, ‘never underestimate the power of stupid people in large groups.'