The listing pop that most retail investors play for when they subscribe to an initial public offering (IPO) didn’t quite work out with Lenskart. The stock listed at a discount of about 3% to the issue price of Rs 402 on the National Stock Exchange, and dipped to an intra-day low of Rs 355.70. The IPO had sparked quite a debate given how the shares were richly-valued at a trailing price-to-earnings (P/E) multiple of an eye-popping 238 times and a price-to-sales multiple of 8-9x. For perspective, the BSE Consumer Discretionary index trades at a P/E multiple of 45 times. Moreover, many highlighted the high offer for sale component, that is 70% of the total issue size of Rs 7,278 crore, wondering why so many investors were selling shares if the company’s prospects were so bright. Yet, in the midst of an IPO frenzy, the issue sailed through, subscribed over 28 times.
To be sure, the company may yet do well and give investors a good return. However, retail investors who are apparently taking a cue from institutions on whether to invest should be aware that the latter are not always buying into an IPO because they believe it’s a good investment. There could be other factors at play. To begin with, the anchor investors, who are subscribing to the IPO at the same price as retail investors, may be putting in very small sums, as small as 0.1-0.2% of their assets under management (AUMs). In that case, one might ask why they are going through the trouble of investing at all. As Devina Mehra, a former investment banker, explains, for anchor investors the investment bankers are free to allot shares at their discretion.
Essentially, the relationship between the bankers and the wholesale investors like mutual funds (MFs) often works on a quid pro quo basis. So, when an IPO is over-priced, investment bankers use their clout to get the MFs to buy a small amount and, in a sense, lend their names to the issue. In return for this, they are assured a good allotment in an IPO that is reasonably valued and where the MFs actually want a holding. So while it may seem like the top MFs are all scrambling to get a share of a richly-valued IPO, they are essentially subscribing to it so as not to miss out on a future allotment that they might want.
New-age technology company stocks are difficult to understand since many of the business models are completely new and the companies don’t boast much of a track record in terms of financials. Many start-ups continue to report losses post-listing and probably have a long way to go before they become profitable. To that extent, it is often a leap of faith because one is not sure of how the company will deal with emerging competitors that might turn out to be even more disruptive. There is also the chance of regulatory changes—as we have seen in the fintech space.
Investors have lost money in several new-age IPOs—Paytm, for instance. Others like Eternal have delivered great value. Many of them continue to report losses in one quarter or another—such as Ola Electric, Swiggy, Mobikwik Delivery, and Urban Company—but might go on to do well. As long as they are aware of the risks, small investors can take their chances.