Beyond the Hype: Are IPOs a Hit or Miss?

Last week on the D-street was like an IPO carnival! The initial public offering (IPO) market seems to be in an unprecedented bull wave, with the debut of five IPOs aiming to raise ₹7,400 crore from investors. This is no small feat — five IPOs in a week is a rare sight.

Quick Takes on Notable IPOs:

• Tata Technologies, Flair Writing Industries, and Gandhar Oil Refinery were fully subscribed within hours.
• The much-awaited Tata Technologies IPO, the first from the Tata Group in two decades, was fully subscribed within 40 minutes, highlighting the excitement among investors.

 🔥What’s Fueling the IPO Fever?

The enthusiasm is largely driven by retail investors who’ve been raking in profits from recent IPOs that debuted with impressive premiums. Reports from The Economic Times suggest that

out of the 44 IPOs listed in 2023, 21 have listed at significantly higher prices than their IPO prices.

It’s not just individual investors caught up in the IPO excitement — even institutional investors such as mutual funds are diving in. There’s a noticeable rise in money flowing into mutual funds, especially those focused on mid and small-cap stocks. In October alone, the net investment in equity mutual fund schemes skyrocketed by 42%, reaching ₹19,957 crore. This surge is fueled by the growing interest in small- and mid-cap schemes, and as a result, these funds are also now making their way into the IPO market

🚨IPOs – A Hit or Miss? 

2021 was regarded as one of the best years for IPOs as more than 130 companies went public.

But 2022 brought a reality check. Unicorn giants like Zomato, Nykaa, Paytm, and Policy Bazaar, which went public in 2021, faced challenges, trading below their IPO prices in a bearish market. While Zomato and Nykaa reported profits in Q1 FY24, others like Paytm and Policybazaar are still struggling to reach profitability

Source: NSE, data as of 24 Nov ‘23

On a brighter note, Zomato and ideaForge are now trading above their IPO prices, suggesting a potential recovery. Perhaps, it’s the market’s discipline or the startups’ maturity guiding them through the aftermath of 2022.

However, this success story doesn’t apply to all new listings. A study by Windmill Capital revealed that newly listed companies outperformed the Nifty 500 in only 4 years from 2010 to 2021.
This indicates a reality all investors must confront – IPOs can be a hit or miss affected by several factors including economic conditions, market sentiment, and most importantly the fundamental metrics of a company

💡Navigating the IPO Wave

When it comes to IPOs it’s easy to buy into the hype of IPOs rather than looking at the numbers on a lengthy document.

Why? Perhaps due to a psychological bias called the narrative fallacy. Narrative fallacy is the tendency of people to create a story out of unrelated facts. People fall prey to this bias to make sense of the randomness in our world. And stories help them do that by making them believe that there’s a logical correlation between facts.

Positive IPO stories can be enticing, leading investors to ignore crucial details like a company’s history of losses.

As we anticipate IPOs from known startups like FirstCry, Lenskart, Swiggy, PayU, MobiKwik, Infra.Market, OfBusiness, and PhonePe in 2024, the familiarity with these brands can cloud judgment. Here’s a reminder: When faced with a compelling IPO story, take a step back, look beyond the headlines, and look into the fundamentals and valuation to get the true picture. 

The world of IPOs is all about companies bringing fresh ideas to the market. Speaking of fresh ideas, explore a curated collection of portfolios based on innovative investment ideas like startups, green innovation, and more.