Even as many investors continue to be euphoric about investing in IPOs with more than Rs 66,000 crore raised from the primary markets in 2017 alone, many top investors including Rakesh Jhunjhunwala have steered clear investing in them.
Even as many investors continue to be euphoric about investing in IPOs with more than Rs 66,000 crore raised from the primary markets in 2017 alone, many top investors including Rakesh Jhunjhunwala have steered clear investing in them. Often referred to as India’s Warren Buffett, Rakesh Jhunjhunwala told Reuters earlier this month, “There is a lot of froth in the IPO market, stay away.” The big bull of Dalal Street added that he has largely avoided the recent flurry of IPOs and has unwound the few small bets he placed in these offerings.
On similar lines, Mohnish Pabrai, a leading US-based investor told ET Now last month, “There is a very simple rule of investing I follow, which is, never ever invest in any IPOs.” Explaining the rationale behind such a rigid stance, Mohnish Pabrai said, “So first off all an IPO is a company selling shares into the market. The company controls the timing, the company controls the story…. These are auction-driven entities basically tend to give us a pricing that goes to extremes.”
Rakesh Jhunjhunwala too noted that that the companies in 2017 had come out with overvalued IPOs. However, the recent tepid listings could lead to a “lull” in the IPO pipeline, and companies coming to market might readjust their pricing. “They will have to wait for two to three months and then come at lower or fairer valuations,” Rakesh Jhunjhunwala told Reuters at the sidelines of an event.
In fact top market experts point out that as most of the IPOs are pricey, there’s hardly anything left for investors in the table, even as promoters cash out their positions. In 2017, at least nine high profile IPOs had seen promoters completely sell out their positions via offer for sale. In offer for sale, money received through IPO will not go to the company, but will go to promoters who are selling their shares. Top names such as Rs 8,400 crore SBI Life, ICICI Lombard General Insurance, BSE Ltd and Eric Life Sciences were complete offers for sale.
Top fund manager Sunil Singhania suggests that investors look at companies in the same sector as the IPO company to find value buys, as IPOs may be over-priced. “A smart investor can look at companies in the same sector as the IPO and find companies which have a much more reasonable valuation,” he said explaining that when Godrej Agrovet Ltd got listed at a whopping 34% premium, other animal feed companies too got re-rated by brokerages.
As the stock markets have been booming, many companies have timed their IPOs to get higher valuations, say analysts. “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,” Harshil Sethia of BP Wealth told FE Online last month.
Kotak Institutional Equities said in a research note last month, “Overall market valuations look palatable but hide super-rich valuations of ‘growth’ stocks and expensive valuations of companies with mediocre business models.”