TomorrowMakers

Last year (2020) and this one (2021), we saw a lot of IPOs listing at significant premiums. Despite listing at such huge premiums, the share prices of some companies continued to climb even higher in the following days. Most investors who were lucky to get share allotment in some of these IPOs quickly sold the shares and pocketed the gains. 

The question is: should you, as an investor, sell your IPO shares so early?

If you check the history of some companies regarding the amount of wealth they have created for their shareholders over time, you will think twice before selling on the day of listing. Many companies have made their shareholders crorepatis over the years, even when they held as few as 100 shares of the company at the time of the IPO.

Let us look at five such companies that have created huge wealth for their shareholders since the time of their listing.

1. Infosys

Infosys, which NR Narayana Murthy started in 1981, came out with its IPO back in 1993. The company priced its shares at Rs 95 during the IPO. On the day of listing, trading opened at Rs 145 per share, a premium of Rs 50. Let us assume that an investor got an allotment of 100 shares in the IPO. The total investment of the shareholder would be Rs 9,500 (100 shares x Rs 95 per share). Had this investor sold the shares at the listing price of Rs 145, they would have got a profit of Rs 5000 (100 shares x Rs 50 profit per share).

But, what if the investor held on to those 100 shares till today? In these 28 years, Infosys has rewarded its shareholders with bonus shares on many occasions. The company also went for a stock split in the ratio of 2:1 in 2000. Based on the stock split and bonus share issues, an investor who held one share during the IPO would have 16,384 shares today (July 2021).

Chart: Infosys history of stock split and bonus share issues

So, an investor holding 100 shares since the IPO would have 16,38,400 shares today. As of 30 July 2021, Infosys shares are trading at Rs 1610. So, the 16,38,400 shares would now be worth Rs 263,78,24,000 (Rs 263.78 crore).

If the investor had sold on the day of the IPO listing, they would have earned Rs 5000 (100 shares x Rs 50 profit per share). But if the IPO investor were to be holding the original 100 Infosys shares today, after the stock split and all bonus share issues, they would be sitting on a wealth of Rs 263.78 crore. This is the kind of wealth you can create if you hold on to IPO shares of good companies.

The important message here is that you should not get carried away by the IPO listing gains on the first day. You should hold on to the IPO shares for long-term wealth creation.

Chart: Infosys share price movement since its IPO

The above chart shows the tremendous growth in the Infosys share price since its IPO listing in 1993. As per Motilal Oswal’s 25th Annual Wealth Creation Study released in December 2020, Infosys was the fastest wealth creator for its shareholders during the 25 years between 1995 and 2020.

As can be seen from the above chart, the share price of Infosys has grown at a CAGR of 30% in the last 25 years (1995-2020). This huge growth in the share price has been backed by the solid 33% profit CAGR reported by Infosys during this period. During the same period, the market capitalisation of Infosys went up from just Rs 3 billion to a huge Rs 2727 billion.

2. Reliance Industries Ltd (RIL)

Just like Infosys, Reliance Industries Ltd (RIL) has also made its shareholders crorepatis. RIL came out with its IPO in 1977. The issue got oversubscribed seven times. Since its IPO, RIL has grown from strength to strength. From Rs 10 crore in 1977, the company’s market capitalisation crossed Rs 10 lakh crore in 2019. RIL became the first Indian company to cross this figure.

Chart: RIL shareholder wealth creation journey

As can be seen from the above chart, an investment of Rs 10,000 in the RIL IPO in 1977 became worth Rs 2.10 crore in 2019. Since 2019, in the last two years, the share price of RIL has gone up further.

Chart: Growth in RIL share price in the last 25 years

As can be seen from the above table, RIL has compounded shareholder wealth in the last 25 years. As per Motilal Oswal’s 25th Annual Wealth Creation Study released in December 2020, RIL was the biggest wealth creator for its shareholders during the 25 years between 1995 and 2020. During the last 25 years, the RIL share price grew at a 16% CAGR, profit grew by 16% CAGR, and market capitalisation grew from Rs 120 billion to Rs 7,052 billion.

3. Kotak Mahindra Bank

In the above sections, we saw how, as per Motilal Oswal’s 25th Annual Wealth Creation Study, Infosys was the fastest wealth creator during the 25 years from 1995 to 2020. During the same period, RIL was the biggest wealth creator for its shareholders. But, it was Kotak Mahindra Bank that was the most consistent wealth creator during the 25 years.

Chart: Growth in Kotak Mahindra Bank share price

As can be seen from the above table, the share price of Kotak Mahindra Bank has been moving up steadily. In the last 25 years, the bank has outperformed its benchmark in 21 years. This performance speaks volumes about the bank’s consistency in delivering steady shareholder returns. During these 25 years, the bank share price grew at 21% CAGR, its profit grew at 22% CAGR, and its market capitalisation grew from just Rs 9 billion to a humongous Rs 2480 billion. 

4. Asian Paints

Asian Paints, India’s largest paint company, has also been one of the largest wealth creators for its shareholders. Asian Paints came out with its IPO in 1982. 

Chart: Asian Paints – 30 years of shareholder wealth creation (1990-2021)

At the end of 1990, the share price of Asian Paints was trading at just Rs 3 (adjusted for stock splits and bonus share issues). But today (July 2021), its share price is trading at Rs 3000. In 30 years, the Asian Paints share price has multiplied by 1000 times. So, an investment of Rs 10,000 in Asian Paints shares in 1990 is worth Rs 1 crore today.

What is interesting about Asian Paints is that it is a consistent wealth creator, just as we saw in the case of Kotak Mahindra Bank. Out of the last 30 years, the stock has given positive returns in 25 years and negative returns in only five years. Also, in the last 12 years, the stock has given positive returns every single year!

Chart: Performance of Rs 1 lakh investment in Asian Paints

The above table shows how a Rs 1 lakh investment in the shares of Asian Paints would have fared over time depending on the investment time horizon. If you had invested Rs 1 lakh in Asian Paints in 1990 and held those shares even today, your wealth would be Rs 9.21 crore.

In 25 years (1995-2020), Asian Paints’ share price grew at 22% CAGR, its profits grew at 18% CAGR, and its market capitalisation grew from Rs 11 billion to Rs 1599 billion.

5. Pidilite Industries

You may or may not have heard of this company (Pidilite Industries). But you would surely have heard about (and used) its products such as Fevicol, Fevistick, Fevikwik, M-seal, etc. Yes, Pidilite Industries is the owner of all these well-known brands. 

Pidilite Industries has a whopping 70% market share in the adhesives segment. No wonder the company is one of the biggest wealth creators for its shareholders. In 1995, shares of Pidilite Industries were trading at a mere Rs 4. Today (July 2021), the share price is in four digits at Rs 2300.

Chart: Pidilite Industries – 30 years of shareholder wealth creation (1990-2021)

As can be seen from the above table, Pidilite Industries has multiplied shareholder wealth 465 times in 25 years. An interesting fact about the company is that its share has not given negative returns in any year since 2011!

Chart: Performance of Rs 1 lakh investment in Pidilite Industries

The above table shows how Rs 1 lakh investment in shares of Pidilite Industries would have fared over the years depending on the investment time horizon. If you invested Rs 1 lakh in Pidilite Industries shares in 1995 and held on to them, today your wealth would be Rs 4.65 crore.

In 25 years (1995-2020), Pidilite Industries’ share price grew at 25% CAGR, its profits grew at 20% CAGR, and its market capitalisation grew from just Rs 3 billion to Rs 689 billion.

Last words

We have seen just five examples of companies (Infosys, RIL, Kotak Mahindra Bank, Asian Paints, and Pidilite Industries) that created wealth for their shareholders since their IPOs launched. Similarly, many other companies have made their investors wealthy – those who held on to their shares from the time of the IPO. The key message here for investors is that they should retain the IPO shares of good companies. Don’t get carried away by listing day gains. To create substantial wealth, hold on to the shares for a longer period.