After opening the day in green, share markets in India are trading on a volatile note and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the IT sector and stocks in the pharma sector witnessing maximum buying interest.

The BSE Sensex is trading up by 70 points (up 0.2%) and the NSE Nifty is trading up by 6 points (up 0.1%). Meanwhile, the BSE Mid Cap index is trading down by 0.8%, while the BSE Small Cap index is trading down by 1.8%. The rupee is trading at 72.56 to the US$.

In news from the IPO space. State-owned railways engineering and construction firm Ircon International made a tepid debut on the bourses today and opened the day down 11.2% from its issue price.

The Rs 4.7-billion initial public offer was subscribed 9.9 times during 17-19 September 2018. The issue price was fixed at higher end of price band of Rs 470-475 per share.

After RITES, this was the second stock market listing by a PSU in 2018-19. As a part of its disinvestment plans, the government sold around 10% stake in Ircon to raise around Rs 4.7 billion.

What if one had invested in all the IPOs? How have the IPOs performed in the previous year? And, have they outperformed the indices?

According to an article in Business Standard, an investor who bet on the 33 IPOs of 2017 (on a weighted average basis) has seen the value of investment rise by 17%. However, compared to broad market indices, the underperformance is a bitter disappointment.

Below chart clearly shows the underperformance of IPOs.

IPOs Underperform Broad Market Indices

Interestingly, if you take the Avenue Supermarts (D-mart) and HDFC Life out of the equation from the IPOs above, the gains drop to a meager 6%. Compared to this, the Sensex has gained 27%, while the small-cap index surged more than 50%.

What is the reason for this underperformance?

One of the key reasons IPOs have touched the altitude is due to a surge in the Indian equity market backed by liquidity and increasing investor demand for financial assets. Private equity investors and promoters took advantage of the absurd demand and came out with sky-rocket valuations. This is what we call a valuation bubble in the IPO market.