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Lessons from the IPO of new-age technology companies

Varun Fatehpuria
March 21, 2022
IPO Lessons
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The recent stock price performance of some of the hottest Indian technology companies have left investors bewildered. While it didn’t come across as a surprise to the more seasoned market participants, it served as a rude awakening call to the rest. 

Let’s try and understand how we got to this and what are the 5 lessons from the IPO of these companies we can draw. 

How We Got Here:

The Indian start-up ecosystem is still in its early days and nascent compared to its counterparts in the US and China. The industry has grown significantly over the past decade however it has still been a challenge to produce self-sustainable companies. Most of these firms have bankrolled their growth on the back of a nearly endless funding flow from the VCs. This has also been due to the fact they had been forced to tap the private markets for their capital requirements as the Indian public markets and the market regulator remained sceptical of loss-making firms.

However, come 2020 and all of that changed. With increasing free time on hand, investors took to investing as a national pass-time. Couple that with brilliant FOMO-led marketing with headlines like ‘How 2020 is going to be a watershed moment for the Indian technology industry’ – and you have got the perfect recipe to create the hype that these IPOs need.

Where Are We Now:

2021 saw the listing of 5 such notable technology companies i.e. Zomato, Nykaa, Paytm, Policy Bazaar, Cartrade. The table below shows their YTD performance –

Sl. No.

Name of the firm

Price (as on 1/1/2022)

Current Market Price (as on 17/3/2022)

Gains / Loss (in %)

1.

Zomato

137

80

-42%

2.

Nykaa

2,101

1,517

-27%

3.

Paytm

1,334

597

-55%

4.

Policy Bazaar

950

745

-20%

5.

Cartrade

848

571

-32%

 

5 lessons from IPO of these companies:

a. It’s never a good practice to fall for hype: A lot of the investing apps have gamified the entire IPO process. It always helps to look beyond these gimmicks and one-off marketing fervors and think independently about such events.

b. Do your own research and diligence: All the companies release a Draft Red Herring Prospectus (‘DRHP’) in a SEBI-prescribed format prior to their IPO. The DRHP contains vital information about the company, its future prospects, operations etc. It is a cumbersomely long document that most investors often tend to overlook – however, going through it in detail can help you uncover important details about the company.

c. Look for the Offer-for-Sale component in the IPO: Offer-for-Sale (‘OFS’) is a practice through which existing shareholders of the firm offload their stake in an IPO. A higher OFS component is usually a negative sign as this implies that the promoters/investors are merely looking to IPO to cash-in on their own holdings.

d. There is no get-rich-quick scheme in the markets: It may be tempting to think of IPOs as an opportunity to make some quick buck – yet that is rarely the case. As these IPOs have demonstrated, in the fullness of time the companies tend to trade closer to their intrinsic value.

e. IPOs are indeed blind bets: Your friend or the Sharma-ji uncle may have scooped up some gains by playing the listing day game i.e. buying and selling on listing day at a premium. However, that does not mean that he/she will be able to do that repeatedly. Since 2007, 456 companies have conducted IPOs on the Indian bourses. Of these, 125 opened lower compared to the issue price, while 29 of them opened flat. Among the remaining which opened higher, 117 opened only with gains of up to 10% [1].

It may be a truism but time in the market > timing the market. The earlier we learn that, the better investing experience we will have. We know that feeling when we see someone we know make quick and easy money – however, that is transient. It’s important to not fall for the supposed gold-rush in investing because unfortunately there is none. The upcoming LIC IPO will also be a test-case to determine whether the retail participation gets affected by these recent debacles.  

If you are all too overwhelmed with all this and need a guiding hand, we are here to help. Daulat offers low-cost, fully-managed and diversified multi-asset model portfolios that can help you achieve your financial goals. We implement these using a combination of active and passive mutual funds/ETFs. 

Speak to one of our wealth experts today! 

References: [1] Capitalmind Research

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