The volatility of IPO craze in India

You've probably heard of the IPOs of well-known start-ups and organizations like Nykaa, Mobi Kwik, Paytm, and the well-known LIC. In 2021, a number of enterprises went public, ranging from computer start-ups to chemical manufacturing firms and restaurant franchises. More companies are anticipated to follow this path to become listed on local stock exchanges later this year.

But exactly, what is an initial public offering (IPO)? And why are investors so enthused about it?

An initial public offering, or IPO, is a procedure in which a private firm sells its stock to the general public in order to raise funds. A private corporation becomes a publicly-traded company through this approach. Before launching an IPO, a company is deemed private because the general public cannot invest in it and its shares cannot be listed on the NSE or BSE. The company's founders, friends, venture capitalists, angel investors, and others who have been involved from the beginning are among the investors. So, when a firm believes it is developing at a decent rate and is mature enough to meet the SEBI's rules and regulations, it goes public and announces its initial public offerings (IPOs).

Since last year, a lot of corporations have gone public in seeking to raise capital. According to data, firms raised Rs.1,18,704 crore through initial public offerings last year. According to investment bankers, this figure will be easily surpassed in 2022 as more companies end up going public. Despite the fact that the pandemic is still wreaking havoc on India's economy, the domestic stock market has remained unaffected. In fact, the S&P BSE Sensex and Nifty50 stock market benchmark indices are performing better than they have in the past. The primary motivation for most digital and online delivery start-ups, such as Paytm, MobiKwik, Zomato, and others, to go public is to generate finance and expand their businesses as demand develops rapidly. Analysts predict that over 50 digital technology companies will be listed on stock exchanges in the next few years.

So, it appears that an IPO is the best thing that can happen to a firm and its shareholders. However, it is not that straightforward. To better understand this, consider Paytm's disastrous stock market debut.

The parent company of Paytm was one of the most anticipated public offerings of 2021. Even before it opened for subscription, there was a lot of buzz about the Rs 18,300 crore IPO, the largest in Indian capital markets history. Based on the performance of other new-age Internet companies that went public earlier, retail investors expected Paytm to provide great results. This is why a big number of retail investors were taken aback when Paytm's stock plummeted on its first day on the stock exchanges. What are the reasons that led to this?

Overpriced valuation

During its IPO, Paytm wanted a 47x price to sales, but it traded at 26x due to the stock price adjustment. The IPO raised roughly Rs18,300 crore. The exorbitant IPO price values at which these corporations received money have drawn a lot of criticism. Paytm was also chastised for its high value, which was exacerbated by the fact that profitability remained a significant worry for the leading digital payments company. “Valuations are important and in the case of new-age companies, they were expensive. Also, many investors did not have clarity on how to value these new-age IPOs,” says Deepak Jasani, head, of retail research, HDFC Securities.

Highly competitive market

India is becoming a heaven for tech companies and there is just too much competition nowadays. The Indian market already has dozens of apps and payment gateways. And the introduction of Unified Payment Interface (UPI), a real-time retail payment system developed by the government-backed National Payments Corporation of India (NPCI) made things difficult for Paytm. This also led to the overestimation of the prices of shares.

Fundamentals

“Stock prices tend to track the fundamentals of the underlying business. If the company is not making money or is in a very competitive industry without any edge, then in turbulent times shares of such companies go down and may take time to bounce back till fundamentals improve. Shares of fundamentally strong good quality companies tend to bounce back quickly when the sentiment improves,” says Sneha Poddar, AVP, retail research, Motilal Oswal Financial Services. Customer acquisition was a priority for many of these new-age businesses, and profitability took a back seat. Conservative investors must wait for the companies to become profitable and then continue to grow profitably.

So, what can we learn from Paytm's misjudgments?

A large number of retail investors are eager to apply for the shares, especially given how well some recent IPOs performed at first, with some stocks turning out to be multi-baggers for shareholders. In this case, following popular trends is usually not a good idea. Tech companies were all the superstars in 2021. However, not all of them were successful enough to make the expected profit. Investors who backed strong enterprises after consulting experts fared handsomely. You have to look at the business model and sustainability of a firm rather than just going with familiarity. As more people become interested in investing and the stock exchange, India has become a very volatile market for investors. Investment decisions must be made thoughtfully and without haste. It's important to remember that, like the stock market, IPOs carry a certain amount of risk, and that due investigation is essential before investing in them. When it comes to the stock market, timing is everything — when you enter and when you quit. During the IPO, the timing is sometimes ideal, and other times it is preferable to wait. Keep your cynicism at bay. When it comes to the IPO market, a sceptic who is well-informed has a better chance of succeeding.

By- Abhishek Verma

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