Valuation and Pricing of Indian IPOs

Abstract

It is believed that underpriced initial public offerings (IPOs) are undervalued. To empirically test this belief, the present study examines valuation of 292 Indian IPOs listed from 2004 to 2013. In this regard, three questions are posed: first, whether the valuation (P/E multiples) of the industry and comparable peer can explain valuation (‘offer price P/E’ multiple) of IPO firms; second, whether the IPOs are undervalued or overvalued in relation to industry peers; and third, whether the IPOs undervalued (overvalued) in relation to peers are underpriced (overpriced). The results suggest that industry and comparable peer valuations do explain IPO valuation. It was found that there are both undervalued and overvalued IPOs in India. However, IPOs can be underpriced regardless of whether they are undervalued or overvalued in relation to industry/peers. Therefore, retail investors should not consider all underpriced IPOs as undervalued and cheap. IPOs may be priced above industry and yet generate positive initial returns (be underpriced). The IPOs valued below the comparable peers can generate higher initial returns. Thus, the present study contributes in providing relation between pricing and valuation of IPOs in India using industry/peer benchmark provided in prospectus so that retail investors can take appropriate decision about subscribing for an IPO.