By Raghu Palat, Chairman and Managing Director, Cortlandt Rand Consultancy
November is going to be another month of mega-initial public offerings (IPOs) keeping up the growing enthusiasm to cash in on the primary market boom. This trend has been gaining strength over the last few years. In FY23 there were 37 issues that collectively raised Rs 52,116 crore. The following year there was a marginal increase, with 76 issues mobilising Rs 61,922 crore. In the next financial year there was a sharp escalation. Although there were a slight increase in issues to 78, the funds raised surged to Rs 162,387 crore—nearly treble the previous year’s amount.
The momentum has continued in the current financial year as well. In the first seven months, there have been 74 issues that have raised Rs 107,341 crore. The excitement persists with the Lenskart issue which opened on October 31. The company has, prior to the IPO, mobilised Rs 3,300 crore from 147 anchor investors and is hoping to raise a total of Rs 7,200 crore from the market. Several other high-profile issues are lined up this month, such as ICICI Prudential AMC, Groww and Pine Labs, to keep the frenzy alive.
While an IPO is a legitimate and often recommended way of raising capital—especially for those seeking funds for expansion—investors should consider several critical factors before participating in one.
First of all, an IPO often serves as the means by which early investors can exit the company. This raises a very pertinent question. If the company’s prospects are truly as strong as advertised, why are these investors choosing to depart now? One possible reason lies in the pricing—often structured to ensure substantial profits for existing investors, and at the expense of new retail participants.
IPOs can also be a means for promoters to unlock significant gains. Even existing companies and family-owned businesses are entering and tapping into the market, pricing their shares in a manner that will not only boost their net worth but also inflate the paper valuation of their companies. In essence, while IPOs can present genuine opportunities, they can also serve as strategic financial manoeuvres that benefit insiders far more than the average investor.
I am reminded of a remark made by the American billionaire, Bernard Baruch, who cautioned that when newspaper vendors and shoe shiners start enquiring or recommending a stock, it’s a time to be wary. The same wisdom has to apply to IPOs. One must not invest in an IPO because someone tells you that the price will rise meteorically. Investment decisions must be grounded in conviction and careful judgement, not speculation or hearsay.
This brings up the crucial matter of the pricing of an IPO. Prior to its opening, Lenskart had already raised over Rs 3,000 crore from highly respected names such as SBI Mutual Fund, HDFC Mutual Fund, SBI Life, and HDFC Life. These anchor investors subscribed at Rs 402 per share—the upper end of the price band.
However, the company had reported losses for two consecutive years and the current year’s profit stems largely from non-operating income. Additionally, its price-to-earnings ratio is at a humungous multiple of 235. This is high by any standard. Meanwhile, as the company is expanding its retail presence by opening shops, its lease liability is increasing and in FY25, it spent nearly 84% of its operating income on interest payments. The IPO proceeds will probably be utilised to reduce the company’s debt. The question that pops up is whether the pricing is justified. I can only assume that the anchor investors were persuaded to buy the shares at `402 because if it had been at a lower figure many uncomfortable questions would have been asked and the issue itself would have been in jeopardy.
However, in this case, on the very first day the issue was oversubscribed 1.13 times. The issue received bids for 11,22,94,482 against 9,97,61,257 on offer. It’s interesting that the quota for qualified institutional investors attracted 1.42 times subscription, that of non-institutional investors was only subscribed 41%. It is likely that within a very short span the share would quote a lower than offer price.
Recently, when the NSDL issue was offered, the general consensus was that at Rs 800 per share it was underpriced. Upon listing, the stock surged to Rs 1,400 amid strong enthusiasm, but after the initial euphoria the price corrected and is now trading at Rs 1,164. LG Electronics, another issue that was heavily oversubscribed, was offered at Rs 1,060 and listed at Rs 1,710. It is now trading marginally lower at Rs 1,661. Not all IPOs have fared well. Others such as HDFC’s HDB Financial services, which was offered at Rs 740, is now trading at Rs 732. Tata Capital was offered at Rs 326. It listed marginally higher and is now being traded at Rs 326.50. Several lesser-known companies, despite aggressive promotion, are quoting below their offer prices—a reminder that not every IPO guarantees post-listing profits.
This happens often because the prices quoted at the time of an IPO are not always sustainable. Ultimately, price is always driven by market sentiment. As an investor, you must decide on your own whether the price is sustainable and whether a company’s valuation can hold over time. As Charles Lamb once said, “You may derive your thoughts from others. Your way of thinking in which your thoughts are cast must be your own.” Therefore, before you take the plunge, you must decide whether the issue is worth your investment—not just because others believe it is.
Another factor you must remember is that, as a general investor, the amount of shares you are likely to be allotted is usually very little—13 or 18 or 20 or 37. Even if the share surges on listing your profit from such a small holding is miniscule. Therefore, the best tactic would be to sell as soon as you have been allotted a share. In this way, you have the opportunity to make some profit. Then later, if you genuinely believe in the company’s long-term potential, you can always buy a more meaningful quantity—100 or more—making the investment worthwhile.
Above all, never apply for an IPO that you have lingering doubts about. And always take a close look at the people and management behind the issue and the company before investing.