IPO Investment: Are You Bidding on Every IPO? Expert Warns of Significant Losses

The current year has proven to be exceptionally busy for the Indian capital market, particularly concerning Initial Public Offerings (IPOs), while even as the year draws to a close, the flurry of companies launching their IPOs shows no signs of abating; in fact, it appears to be intensifying. October witnessed major players like LG Electronics and Tata Capital. Bringing their IPOs to the market, capturing significant investor attention. Following this, November continued the trend with new-age companies such as Lenskart and Grow launching their own offerings, presenting a continuous stream of investment opportunities. This relentless wave of IPOs has prompted many investors to bid on almost every. New offering, a trend that experts are now warning could lead to substantial financial setbacks.

A Busy Year for IPOs

This year has been remarkably active for IPOs, and the momentum. Of companies launching their public offerings continues right into the year-end. October saw prominent companies like LG Electronics and Tata Capital introduce their IPOs, generating considerable buzz in the market. This trend persisted into November, with Lenskart and Grow, representing the new-age business sector, also launching their IPOs, while this indicates a strong primary market where companies are actively seeking to raise capital, continuously presenting new avenues for investors. However, amidst this bustling activity, a crucial question arises: are you bidding on every IPO? If the answer is yes, then you could be setting yourself up for significant losses, as market experts have cautioned.

Expert Warning: Exercise Caution

Devina Mehra, the founder of First Global, has strongly advised investors to exercise extreme caution when bidding in IPOs. She explicitly stated that the participation of large investors in an IPO shouldn't be viewed as a guarantee of success for retail investors, while her decades of experience in the investment world suggest that the moves of large investors don't always translate into benefits for smaller, individual investors. Mehra emphasized that the share prices in many current IPOs appear to be excessively high. This elevated valuation often discounts future earnings potential prematurely, leaving little room for significant appreciation post-listing, thereby increasing the risk for new investors.

High Valuations in Many IPOs

Devina Mehra specifically highlighted that the share prices in many IPOs currently entering the market seem to be Importantly inflated compared to their intrinsic value or future prospects, while this situation can be perilous for investors, as they might incur losses if the company's performance fails to meet the high expectations set by the initial valuation. She also noted that if an IPO offers shares at reasonable prices and the company boasts an attractive business model, the likelihood of receiving an allotment in such an issue is often low due to overwhelming demand, while this implies that well-priced and fundamentally strong IPOs are frequently difficult for retail investors to secure, while the more expensive ones tend to have higher allotment chances, drawing in less discerning investors.

Beware of FOMO: Invest Wisely

The expert has advised investors against making investment decisions driven by 'FOMO,' or the 'Fear of Missing Out. ' FOMO is a psychological phenomenon where investors participate in an investment simply because they see others doing so, or out of a fear that they might miss out on a potentially lucrative opportunity, even if they aren't entirely convinced about the investment's merits. Mehra explained that many investors bid solely because they observe others participating, fearing that the chance might slip through their fingers. This herd mentality often leads to poor investment choices, especially during periods of market exuberance. A prudent investor should always base decisions on a company's fundamentals, valuation, and future potential, rather than merely following the crowd.

Large Investors Book Profits, You Buy

The founder of First Global shed light on a critical aspect: venture capitalists and early investors often invest in shares at prices Notably lower than those set in an IPO. She cited Lenskart as an example, where the IPO valuation was eight times higher than its last private funding round. This illustrates that early investors made their entry at a much lower cost and are now realizing substantial profits through the IPO. Many IPOs include a significant portion under an Offer For Sale (OFS). An OFS Basically means that large investors, promoters, or existing shareholders are selling their current holdings to book profits, and you, as a new investor, are purchasing those very shares at the prices at which they're cashing out, while this scenario is generally not favorable for retail investors, as they often enter at elevated valuations.

Pressure on Anchor Investors

Devina Mehra also commented on the role of anchor investors. She pointed out that many investment bankers might exert pressure on large investors to participate in an IPO. This often stems from long-standing relationships and business ties between investment bankers and these major investors. Consequently, some funds may invest in an IPO out of obligation or to maintain their market standing, even if they aren't fully confident about the issuing company's business prospects, while this situation can create a misleading perception in the market that if large and reputable anchor investors are participating, the IPO is bound to be successful. However, this isn't always the case, and retail investors should consider this aspect carefully before making their decisions. Mehra referenced the 2021 new-age tech IPO boom, a period when numerous technology companies launched their public offerings. During that time, many of these companies not only saw their share prices falter but their underlying businesses also failed to perform well post-listing. She specifically mentioned Nykaa as an example, where companies often present their most favorable business data and a bright future outlook during the IPO process, while however, post-listing, their performance frequently deteriorates, leading to investor disappointment. This underscores the importance of scrutinizing the information presented during an IPO and focusing on the company's long-term performance rather than just the initial hype.

Lessons from Past IPO Booms

Overall Market Outlook

Despite these warnings regarding specific IPOs, Devina Mehra has ruled out the possibility of a major stock market crash. She stated that there is no anticipation of a significant downturn in. The overall market, but investors should remain mindful of their equity asset allocation. This implies that they should carefully manage the proportion of equity in their portfolios and avoid taking excessive risks. She also expressed optimism that companies' earnings growth is expected to be strong from the third quarter onwards, which is a positive indicator for the market. This suggests that while caution is warranted in specific IPO investments, the broader market outlook remains solid, provided investors make prudent decisions and manage their risk exposure effectively.