homemarket NewsExplained: Is the euphoria around IPOs fading?

Explained: Is the euphoria around IPOs fading?

Explained: Is the euphoria around IPOs fading?
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By Sandeep Singh  Aug 13, 2021 10:08:32 PM IST (Updated)

Many of the recent share sales have not attracted the same degree of investor participation as their predecessors. Valuations have become expensive in the recent IPOs, say market experts.

India's primary market has had a number of bumper initial public offers (IPOs) in recent times. Almost one third of the IPOs launched so far in 2021 have been subscribed 100 times or more.

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But many of the recent share sales have not attracted the same degree of investor participation.
Dalal Street saw the rollout of eight IPOs in July alone. Here's how these latest IPOs have fared:
IPOSubscription (No. of times)Launch
CarTrade Tech Limited20.29Aug
Nuvoco Vistas Corporation Limited1.71Aug
Krsnaa Diagnostics Limited64.4Aug
Devyani International Limited116.71Aug
Windlas Biotech Limited22.47Aug
Exxaro Tiles Limited22.68Aug
Aptus Value Housing Finance India Limited17.2Aug
Chemplast Sanmar Limited2.17Aug
Of the latest IPOs, Devyani's saw the maximum bidding, joining the club of nine issues between January and July that saw subscription of at least 100 times. Here are the top five:
IPOSubscription (No. of times)Launch
MTAR Technologies Limited200.79Mar
Tatva Chintan Pharma Chem Limited180.4July
Nazara Technologies Limited175.5Mar
Easy Trip Planners Limited159.33Mar
Shyam Metalics and Energy Limited121.43June
Is the interest in IPOs fading, at least for now?
"There seems to be some ebbing of interest in IPOs but it still remains strong relative to the historical context," market expert Sandip Sabharwal told CNBCTV18.com.
Valuations have become expensive in some of the recent IPOs, but it is nothing unusual in a bull market. "As the bull market progresses, it is normal for initial IPOs to leave something on the table for investors, however eventually valuations become very high, which is something we are seeing now," he said.
At the current valuations of IPOs, whoever is investing should only be doing it for listing gains, he said. "It is a very high probability that in two years, most of these IPOs will trade below their listing price."
'Fading just a bit'
"I have a feeling that the IPO euphoria seems to be fading just a bit and that it was overdone. Okay, it is a new-age business, different times, different valuations, but there was a rush for IPOs and some of them were extremely expensive in terms of valuation. Something like Zomato has been heavily oversubscribed and done well, but even then, it remains extremely expensive. And though there is momentum, the stock could still go up, but I am uncomfortable," said Kapadia.
There are actually very few IPOs that perform well long after listing, according to AK Prabhakar, Head of Research at IDBI Capital.
"Many of the recent IPOs are not of great quality... It is just euphoria because of which everyone is applying and cashing out. But in reality, they will not make money in the long term... HNIs (high net worth individuals) will not be able to meet interest costs in many cases," he said.
"Such IPOs are not going to benefit the market; If you see six months of one year after listing, very few debutants actually deliver," he told CNBC-TV18.com.
Prabhakar cited the example of Gland Pharma as one stock that performed months after its IPO.
It is indeed an IPO that did not look much promising at the time but did happen to surprise investors eventually. The Gland Pharma stock is up 128 percent since its debut on Dalal Street in November 2020, when its shares were listed at 13.4 percent premium over its issue price following an IPO that was subscribed two times. Gland Pharma's was the biggest ever offering in the Indian pharma space.
"I think the frenzy is cooling off and we should be seeing something more rational from a longer-term point of view. It’s not that all IPOs are expensive, we had something like a Laxmi Organic that has reported good numbers and done very well," said Kapadia, who believes one has to be very selective when in comes to picking IPOs.
Laxmi Organic Industries shares have given a return of 105 percent so far since its debut in March this year. The stock was listed at 20 percent premium following an IPO that was subscribed 107 times.
A reality check
"I always tell people that IPOs is not the place to buy... Most IPOs don't give returns over a longer period of time," said Prabhakar, who believes there are a few IPOs that are good, but advises investors to be more mindful of their IPO choices.
While unique businesses often lead to good listing of shares, there are often companies that launch their IPOs at higher valuations than already listed peers with much more industry dominance. "Due to the euphoria, everything will move higher, but a reality check is a must from time to time," he added.
Echoing similar views, Kapadia said the current situation brings back the "memories of 2007 -2008 which are anything but pleasant. Investors need to be extremely careful when they look for valuations."
"Currently, many of the stocks seem to be unreasonably priced, and if the following results don’t match up to the anticipation, I think there will be a ruse reality check." That is Kapadia's message for investors, especially the impatient kind.
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