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- 📉 IPOs are Overrated
Welcome to this week’s Altsights!
Did your Bajaj Housing Finance IPO allotment get rejected?
Trust me, it’s okay.
Today I discuss why IPOs are overrated and why wasting time and energy to get that elusive IPO allotment is most probably not worth it.
IPOs As Far As The Eye Can See 👀
Private companies launch IPOs to gather investments from the public markets and become a public company in the process.
It is the natural growth path for most companies in the world - right from Microsoft in the US to Zomato in India.
As you can see below, 2024 has been the one of busiest IPO years in the recent times:
Mainboard IPOs are the IPOs of large and established companies
Even The SEBI Is A Bit Concerned 😣
Recently, India’s market regulator - SEBI, expressed concerns regarding how retail investors viewed IPO.
54% of IPO share allotments to retail investors get sold within a week. This shows that retail investors subscribe to IPO simply to make quick listing gains.
The larger concern, however, is the excessive supply and demand of SME IPOs which are quite opaque unlike mainboard IPOs. They are also easier to manipulate.
In 2024, SME IPOs are on fire and we still have 2.5 months to go 🔥
SME IPOs are launched by small and medium enterprises which are not well established
‘Resourceful’ Promoters are Making the Most of SME IPOs
The SME IPO of Resourceful Automobiles, a company with 2 bike showrooms and 8 employees, was recently oversubscribed by more than 400 times.
The company was seeking ₹12 crore but got IPO applications worth ₹4,800 crore 🤯
Why IPOs are Probably Not Worth It 👎🏼
If you see around you, you’ll see how everyone believes IPO is the best time to invest in companies.
It is, after all, the first time the shares of the company are available for the public to buy.
Sounds logical, isn’t it?
But it couldn’t be farther from the truth (especially if your truth is to create long-term wealth from the stock markets without a lot of stress).
Here are 4 reasons why this logic is flawed and why IPOs are overrated:
Reason 1️⃣: Valuations May Not Be In Your Favour 📈
Imagine you have a umbrella business. When would you sell the umbrellas? ☂️
If you are smart, you’ll start just before monsoon and continue to sell during the monsoon season.
IPOs are strictly business for private companies seeking to go public and their smart investment bankers.
They launch IPOs only when they know there will be very high demand for their shares. In other words, during bull markets. The more raging the bull market, the better!
This allows them to launch IPOs at lofty valuations which often result:
Corrections when the bull market ends 🔻
Low returns even over long periods 📉
Reason 2️⃣: You May Simply Be The Greater Fool 😐
IPOs serve two purposes.
We know the first is to gather capital which the business will use to expand further.
The second purpose is to give liquidity to early investors and promoters of the business.
This is neither unethical nor illegal. The early investors and promoters deserve some success and money as reward for taking the company to the IPO stage.
But if the IPO’s objective is to give these folks handsome exits, then IPO subscribers are just greater fools hoping to find even greater fools to make listing gains.
The Greater Fool Theory 🐵
According to the Greater Fool Theory, one can profit from a market bubble by purchasing overpriced assets and later selling them for a profit because there will always be buyers prepared to pay a greater price.
So, it is prudent to stay away from IPOs which involve large sale by the early investors and promoters of the company.
They wouldn’t be selling in large quantities if the share price was going to rise.
Reason 3️⃣: Listing Gains Are Not A Given 🤷🏻♂️
The table below shows how 20-35% IPOs give negative listing gains to investors even in a raging bull market:
Year | IPOs with negative listing gains (absolute) | IPOs with negative listing gains (as a percentage of total IPOs) |
|---|---|---|
FY22 | 14 | 30% |
FY23 | 13 | 35% |
FY24 | 17 | 22% |
Source: KPMG Report Titled ‘IPOs in India’
Reason 4️⃣: Listing Gains Are Mostly Insignificant 🤏🏼
Let’s say you are one of the lucky ones who got the Bajaj Housing Finance IPO allotment. Hurray! 🥳
The share price doubled on listing day and lucky folks like you made a 100% return in just 1 day.
But since the IPO was so oversubscribed you got just 1 lot. That’s about ₹15,000 of listing gains on ₹15,000 of investment.
If you have a ₹5 lakh portfolio, ₹15,000 is just 3%.
If you have a ₹20 lakh portfolio, ₹15,000 is not even 1%.
You can do that math for your portfolio!
You see where this is going?
The IPOs that give you these bumper listing gains probably don’t even make a noticeable dent in your portfolio or net worth.
All they do is give you a fleeting high and maybe some bragging rights for a day or so.
My closing remark is the same as my opening remark - IPOs are simply not worth it.
There are many more IPOs lined up in the coming weeks and months.
I hope after reading today’s newsletter, you’ll adjust your approach towards these new public issues if required.
Cheers,
Madhu,
Founder, Altcase