Ajitansh Kar, Gurugram, 5 January 2023
The last two years were the most successful for the IPO market. In total, 272 companies got listed and collected a massive amount of nearly $25 billion. A roaring bull market after the Covid crash led to many stocks giving huge returns, including the newly listed IPOs. Many companies which got listed had great fundamentals and value to support their issue price while others which did not have good underlying fundamentals, were priced at huge premiums leaving no scope for profit for the investors. These issues generally got listed at huge premiums of 50-80% due to the bull market, despite lacking good value and fundamentals, but are now down by more than 50% from their issue price. Many retail investors are now trapped holding the overpriced shares of such weak companies in their portfolio with little hope of recovering their losses. The most popular example of such a situation is the case of PayTm.
The company’s issue was set to become the largest IPO of the country raising about Rs. 18,300 crore from the primary markets. Many reports and analysts established their concerns over its valuations and poor business model; despite this, many mutual fund houses and retail public investors invested their money in this IPO and lost 75% of their capital in a matter of months. The IPO consisted of an Offer for Sale (OFS) of Rs. 10,000 crore, which was meant to give an exit to the early stage venture capitalists and angel investors of the company.
Recently, another controversy arose in the IPO market related to the upcoming issue of Mamaearth. The company makes skincare products without the use of toxins. The company had filed its Draft Red Herring Prospectus (DRHP) with SEBI on 29 December 2021 and plans to raise Rs. 2,900 crore from the markets, which includes Rs. 400 crore worth of fresh issue and the remaining portion being entirely OFS. Concerns are being raised over the size of its OFS, which is clearly meant to give early investors an exit at the highest valuations possible. The common investors, unfortunately, would be left holding the overvalued shares. Many famous people, such as, Shilpa Shetty and Kunal Bahl, invested early into Mamaearth with an initial investment of Rs. 75 lakh each, which has turned out to be worth Rs.80 crore and Rs. 180 crore each, respectively! They both are planning to sell their stakes in the forthcoming IPO. Others selling their stakes in this IPO include promoter Varun and Ghazal Alagh. The latter has also appeared in Season 1 of Shark Tank India.
Another serious concern regarding the Mamaearth IPO is its valuation. The company made a profit of Rs. 14.44 crore last fiscal and is valuing itself at Rs. 24,000 crore for the IPO according to the documents filled with SEBI. This means Mamaearth’s Price to Earnings (PE) ratio stands at 1744. In simple words, the company is asking for a premium of rupees 1744 for each rupee of profit earned! The industry’s mean PE stands at 365 now.
Though these factors have been pointed out, many would still apply for this IPO and probably lose out money because of poor listing gains and no room for further gains because of the over valuation of the shares. Hence, investors should carefully analyse the pros and cons of each IPO before deciding to put in their hard earned money.