Chasing listing gains? Be careful. IPO bubble may burst soon

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Updated: September 26, 2017 6:36:28 PM

Overvalued IPOs getting grossly oversubscribed has caused a fear of a bubble in the IPO markets. In the nine months so far in 2017, a staggering Rs 30,000 crore have been raised in the primary markets.

Fears of a bubble in the IPO market is not uncalled for. (Image: Reuters)

Even as the Indian IPO markets are all set to post a new record for the highest amount being raised in a single year, fears of a bubble in the markets are not uncalled for. There have been a lot of overvalued IPOs which have been grossly oversubscribed- Prataap Snacks Ltd’s IPO which was priced at more than than 200 times relative to earnings got oversubscribed by 30 times! Harshil Sethia of BP Wealth told FE Online, “Some of the IPO companies are really overvalued. The bubble has to burst sometime.”

The liquidity in the markets has caused many of the companies to come out with their primary issues. In the nine months so far in 2017, a staggering Rs 30,000 crore have been raised in the primary markets. According to Reuters data, 2017 is expected to be a record-setting year for IPOs, with fund raising predicted to exceed 2010’s high of $8.5 billion. According to S Ramesh  Managing Director and CEO of Kotak Investment Banking, India Inc is set to raise Rs 1 lakh crore in the next 12 months.

Harshil Sethia told FE Online, “There is a lot of liquidity in the markets, as retail investors are pumping in amounts which is even offsetting the huge FII selloffs. Every company coming out with an IPO is getting a very good valuation.” According to the analyst, 40-50 IPOs are lined up in the IPO pipeline for 2017. IPO markets have had a dream run so far, with companies such as Avenue Supermarts, Shankara Building Products, Apex Frozen Foods etc posting stellar listing gains, analysts say that the trend is unlikely to continue for too long.

In a research note, Kotak Institutional Equities said, “Overall market valuations look palatable but hide super-rich valuations of ‘growth’ stocks and expensive valuations of companies with mediocre business models.” However, while the IPO overvaluation may cause fear among market participants, companies with good business models will continue to get attractive valuations. Siddharth Purohit of Angel Broking said in a note to FE Online, “Companies with strong business model and healthy financials would continue to get good response in the primary market, and hence the IPO market could remain active during the year.”

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