2021 has so far seen 49 companies float Initial Public Offerings (IPOs) to raise ₹1.01 lakh. This is touted to be the most raised through IPOs over the last 20 years. November 2021 alone saw eight IPOs that included FSN E-Commerce Ventures that runs Nykaa, parent company of Policybazaar — PB Fintech, One 97 Communications that owns Paytm, and Sapphire Foods India to name a few. While Paytm’s stocks tanked by 20%, Nykaa and Zomato listed to watch their stocks soar to a 80% and 66% high, respectively.
While many are calling this an ‘IPO bubble’ that is likely to burst, experts have attributed the rush towards going public as the result of — increased liquidity, SEBI easing up listing procedures, and the bullish nature of the current market. In fact, the last time we saw an IPO frenzy that comes close to 2021 was the bull run of 2017-2018 that saw IPOs/FPOs/OFS worth ₹98,000 crore.
But how sustainable is this trend?
Free falling Paytm stocks had several investors raise questions around how sustainable the trend is and it’s larger impact on the risk appetite of investors for upcoming IPOs like the insurance stronghold — LIC. Additionally, it remains to be seen how the underperformance of Paytm is likely to affect relatively small scale players like MobiKwik that is holding off its IPO, post a valuation drop estimated to be in the neighbourhood of 30-40%.
Why are investors still investing then?
IPOs have always attracted investors for being a rather hot money-making prospect — especially with securities locked away in secondary markets. And it is not unpopular for HNIs to procure funds on credit at the time of IPOs at unusually high interest rates. The next step for investors is to wait and watch if they were able to leverage their way into an IPO. And let’s say, if they do bag an allocation and the company lists at a larger premium when compared to the total cost of funding, they would have made a decent earning. This is of course the best case scenario, however the second half of 2021 saw 25% of IPOs listed at a discount, leading to losses for investors and financiers.
A word of caution
According to the State Bank of India (SBI) there are over 14.2 million new individual investors who have actively participated in exchanges between 2020 and 2021. Simply put, the IPO rush has been mirrored by retail investors flocking to make the most of the post-pandemic bull run. This makes it all the more important for investors to do their due diligence that goes beyond assessing listing gains. Moreover, it is essential to also have a clear understanding of the fundamentals, valuation of an IPOs, and scope for growth.
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