Domestic equity markets are up about 14% this fiscal year, benchmark indices are at record highs and there has been a steady stream of initial public offerings (IPOs) since April. However, market experts advise private investors to exercise caution when applying for an IPO – the current valuations of companies are high and many investors have been left behind in the 2021 IPO boom.
According to data compiled by Prime Database since April this year, 12 companies have raised a total of Rs.12,149 crore through IPOs. Successful IPOs include Mankind Pharma, Cyient DLM Ltd, Ideaforge Tech and IKIO Lighting.
These IPOs tended to be small offerings, with companies being cautious about valuation.
Are further IPOs planned?
According to Prime Database, 43 companies have received IPO approval from the market regulator SEBI, aiming to collectively raise nearly Rs.57,000 crore.
Twenty-nine others – who hope to raise Rs.35,879 crore – have submitted bid documents and are awaiting regulator approval, according to Prime Database.
So is it risky to invest in an IPO right now?
VK Vijayakumar, chief investment strategist at Geojit Financial Services, said the current recovery in the domestic market means Indian companies’ valuations are very high from a near-term perspective.
The price-to-earnings (P/E) ratio for the trailing 12 months is 25 and the forward P/E for a year is around 20, which is high given the long-term Indian average of around 16. (P/E is the ratio of a company’s shares price to earnings per share of the company. PE is used to determine whether companies are over- or undervalued.)
When valuations are high, markets tend to correct when there’s a trigger — and investors can lose money, as was the case with some previous IPOs. “If valuations are good, investors can apply for an IPO. Otherwise, they are better off staying invested in the secondary market,” Vijayakumar said.
What homework should retail investors do?
Pranav Haldea, managing director of Prime Database Group, said retail investors need to define their objective when applying for an IPO – whether they are interested in listing or as a long-term investor.
“If you are going in as a long-term investor, you should read the bid documents, understand the company’s business and financial performance, look at the promoters and the level of corporate governance,” Haldea said. “Investors should also look at previously listed competitors to get a feel for the company’s valuation. Finally, they should also be guided by the participation of institutional investors in the IPO,” he said.
What happened in 2021 and what lessons can we learn from it?
Investors, funders and companies are cautious as many high-profile IPOs have been disappointing in 2021 – their share prices falling below their IPO prices. The share price of LIC, whose IPO ended at Rs.949 per share, is still below the issue price of Rs.644.40, down 32%.
Experts say that while new-age tech companies commanded high premiums and benefited from market liquidity and investor enthusiasm for these companies during the pandemic, sentiment later softened.
“Promoters and companies tend to overstate IPOs when markets turn bullish. They leave nothing on the table for investors. The markets occasionally experience boom-and-bust IPO trends. Still, retail investors are throwing caution to the wind,” said an analyst at a brokerage firm.
Up to 76 companies have raised more than Rs 1.3 billion in the stock markets in 2021-22 – the highest mobilization in a year. Retail investors lined up in large numbers and in many cases returned dejected after mass issuance ensued – some of the issues were subscribed to over 100 times.
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