We are all in a hurry to get rich. We all feel the FOMO (Fear of Missing Out). But only a few people can get rich at the expense of all the others. The easiest way to do it by taking out a hugely over-priced IPO which small investors will rush to buy and you can offload the shares of your loss-making company or a company whose profits are not sustainable. A few examples:
One 97 Communications (Paytm)
PB Fintech (Policybazar)
FSN Ecommerce (Nykaa)
Zomato
There is no denying the fact that we are in a bubble when it comes to IPOs. People are rushing to buy these public offerings, no matter the valuations or the business model. They just want a piece of the action. They think it is their ticket to get-rich-quick.
Indians have seen the tremendous performance of FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet's Google) and feel that this time they can make money from such new-age tech stocks in India. When we carefully analyze these companies with huge IPOs coming in the Indian market, we see that they have been in business for a number of years and are still struggling. What they are doing is getting attention by spending a lot on media, advertising and PR. Brokers and investment banks want us to buy these IPOs as they will earn huge commissions. Nobody will point out that these IPOs are priced only for the benefit of the company's promoters. Investors are happy if they get an allotment and they will be ready to sell the shares on the listing day. No one is looking to buy and hold these businesses for multiple years. After a few weeks or months people will forget about the IPO, the promoters will be rich beyond their dreams and a few investors will be left holding the bag.
These companies would not be good investments by any yardstick, whether in an IPO or in the secondary markets after listing. The major rationalizations given for investing in such businesses is that the losses are the price to be paid for entry into fast growth sectors and for capturing market-shares. Are any of these companies so well-known like those global companies, whose products and services we use everyday? What justifies these IPO prices? Only the greed of the promoters and investment bankers. All of these promoters are just selling 'stories'. And whoever buys their stories, helps them in getting rich.
People have been borrowing money to put in IPOs. They will pay interest on that money and may not even get allotment of shares. Even if they get a few shares allotted, they may not even break even.
Let's do a simple market value comparison for such an IPO stock which got listed today (10 Nov, 2021) - Nykaa.
Market cap comparisons:
Nykaa - 95,000 Cr
BPCL - 94,000 Cr
Britannia - 87,000 Cr
IndusInd Bank - 82,000 Cr
Dr Reddy - 80,000 Cr
Tata Consumer - 77,000 Cr
Eicher Motors - 75,000 Cr
Cipla - 74,000 Cr
Hero Motors - 54,000 Cr
Does Nykaa, a cosmetics company which sells its products online is more valuable than such well-known and established companies like Britannia or Hero Honda? Can this company survive competition from Amazon which has many brands of cosmetics available to sell online? I don’t think that it will survive for a long time. The promoter is rich, now she may even sell her company, it does not make any difference to her.
Here is a video of the world’s greatest investor, Warren Buffett, saying that he has not invested in an IPO since 1955.
I have not applied for any IPO in many years because I'm cautious about my hard-earned money. What is common among these companies is that they are heavily funded by venture capitals funds, they have never made any profits, and mostly are showing losses. The entire IPO party in India will come to an end sooner or later, but nobody knows when the bubble will burst. All IPOs are not bad, but we need to be very selective. There were some good IPOs which came in the market in the last few years. But in 2021, it makes sense to stay away from the IPO madness in the market. Invest in companies which have been around for many years and have been consistently profitable. Or else, choose mutual funds or better index funds.