Are IPOs really worth the hype?
With 7 of the 14 IPOs listed in 2020 giving more than 50% listing premium and 3 of them giving more than 100% returns, the IPO market in India has gained huge hype. But is it really worth it?
“Hey bro, Burger King gave me more than 100% returns on listing.”
“Congrats man! You are really lucky. I also had applied for all the good IPOs recently, but didn’t get any of them. Wonder if there is some muddle involved in it?”
Feels like a conversation of 2 guys discussing over their lottery winnings and losses. Isn’t it?
But literally, in the year 2020, the IPO market has justified the famous notion – IPO ALLOTMENT IS A LOTTERY!
With 7 of the 14 IPOs listed giving more than 50% listing premium and 3 of them giving more than 100% returns, the hype seems to be somewhat legitimate…
But a question which pops up is that the mad rush of retail investors to bid for the IPOs is really justified?
Maybe few of the arguments and analysis can help us reach the conclusion for this, but let’s have an initial knowledge of what an IPO is and why do companies launch their IPOs or in simple words go Public.
So, there’s a business which needs funds and for that it decides to reduce its stake in the company by selling the shares of the firm to common public. For this process, it takes the help of an Investment Banker who helps in selling shares to the public, collects money and gets the shares listed on a stock exchange for trading. Hence in a nutshell, IPO or an Initial Public Offering is a company offering its shares to the common public for the first time.
Then if the company is going public for the first time, and the owner is going to receive money once only at the time of listing, doesn’t it make sense for him to sell the minimum number of shares at the maximum price. And it’s common sense that this would happen only if the stock market is flying high (like it’s happening currently). So, it’s a perception of stock getting good response in good times and this is the reason that in last 5 months we’ve seen so many IPOs getting launched in the market with bumper returns, while there wasn’t a single issue launched during the lows of middle months of the year due to COVID. There’s also a positive momentum of great economy which delves positive mindset in the investors seeing the advertisement of the IPOs which further leads to FOMO if not applying for the IPO. (Sab laga rahe iss IPO mein. Mujhe bhi lagana chahiye).
Next if we see the IPO list of this year and their gains, we’ll see that 4 IPOs have been listed on discount and 1 IPO gave a single digit return. That’s almost 33% of the IPOs not turning out to be good. But does anybody talk about them? Unfortunately, no. It’s only Route Mobile, Burger King and Bectors Food that take the limelight. Not anybody’s fault though. It’s human psychology to ‘perceive the best and ignore the rest’.
And this also leads to retail investors getting trapped a number of times when the informed investors stay away from the IPO issue and the general mass gets allotment of all shares applies. Like in the case of UTI AMC, almost every person had got the subscription of shares and it listed on a discount of 11%.
One important flaw in the case of IPOs is also lack of information. Today for a listed company, we check last 5 year returns or last 10 year returns along with a number of parameters to check its prospects. But in the case of a company going public for the first time, there’s very limited information. To give an example, maybe just last 3-4 years financials. That doesn’t lead to an informed decision making of investing in that IPO.
Lastly, even if the IPO debuts successfully in the market, there’s still a risk looming in near term which are the shares of the company insiders (employees, investors, etc.). These insiders are prevented from selling their existing shares for 90 or 180 days from the date of listing. Actually, this seems to be a good provision, but once the lockup period ends, there may be a huge selling pressure on the stock which may bring it down substantially affecting the gains.
Gauging all these arguments, the IPO definitely doesn’t seems to be a good mode of investment for long term, but what drives the huge positive sentiment towards these IPOs is exactly summed up by the dialog… “Risk ha toh Ishq hai”!
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P.S. – Almost 6 IPOs would be launched in January’21. All the Best and Best of Luck!
By: Anmol Gupta | Isha Garg
Amazing.