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Analyst who called the Reliance Power debacle has this to say on IPOs of today

When companies with fictional business models, empty balance sheets and bleeding P&Ls seek steep valuations, it should send the alarm bells ringing. This has been the case, in the past, with IPOs of several stocks from infrastructure, power, telecom, and NBFC sectors at various market peaks. (Photo: iStock)Premium
When companies with fictional business models, empty balance sheets and bleeding P&Ls seek steep valuations, it should send the alarm bells ringing. This has been the case, in the past, with IPOs of several stocks from infrastructure, power, telecom, and NBFC sectors at various market peaks. (Photo: iStock)

  • Co-head of Research at Equitymaster weighs in on the Paytm debacle and which IPOs to look forward to

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Nowhere has the euphoria been more prominent than the initial public offering (IPO) market. The retail crowd has been very bullish on IPOs for quite some time. Almost every IPO has had a good listing because of this bullish sentiment.

However, the most awaited and biggest IPO of all – Paytm – has crashed investors' hopes and took the market sentiment down too.

We reached out to Tanushree Banerjee, co-head of Research at Equitymaster and editor of StockSelect, for her thoughts on the Paytm IPO, the situation with regards to upcoming IPOs, and much more.

Back in 2008, Economic Times called out Equitymaster for being the only entity with an “Avoid" view on Reliance Power IPO. Tanushree and her team have been reminding readers of risks like this for years.

Tanushree even wrote an editorial on why she would avoid the Paytm IPO.

If you closely track IPO developments, and are serious about making money from IPOs, then this interview is a must read.

Equitymaster - Is Paytm the Reliance Power IPO of 2021? Will it be the signal that called the top of the market?

Tanushree - It’s a fact that expensive IPOs signal the market peak in terms of valuations.

But we need to read a bit more into this.

When companies with fictional business models, empty balance sheets and bleeding P&Ls seek steep valuations, it should send the alarm bells ringing. This has been the case, in the past, with IPOs of several stocks from infrastructure, power, telecom, and NBFC sectors at various market peaks.

But the case of recent startup IPOs is slightly more structural. These are businesses that have created an entirely new segment in Indian stock market that did not exist until recently. It’s the segment of stocks with very high risk-high return equation.

Investors in India could, until recently, get exposure to such niche startups, only through their holding of US-listed stocks. So, the appetite for such IPOs was very high, which resulted in most of them managing to fetch blockbuster listing.

In the case of Paytm, apart from very low visibility of profits, the complexity of the business model and few corporate governance issues made investors wary.

So, while there is no denying that markets are close to the peak, I would not equate the Paytm IPO to that of Reliance Power.

Equitymaster - How do you see the situation with regards to IPOs evolving in the weeks and months ahead?

Tanushree - There are two things happening here.

One, Indian startups, across various kinds of businesses, would seek to debut in the stock markets.

Two, investors would get trained to carefully understand and evaluate such startup IPOs without giving in to FOMO or going blindly by market sentiments.

So, I think, over the months and years, the frothiness in these IPOs will go away and deserving companies, whether unicorn or not, will find it easier to raise capital.

Equitymaster - Any recent IPOs you thought offered value? Also, IPOs that shocked you in terms of the asking price?

Tanushree - No, I don’t think any of the recent IPOs left much on the table for retail investors and almost all of them, had very steep asking prices.

Equitymaster - Any IPOs you are looking forward to? What will you look out for to decide whether they are worth an investment?

Tanushree - I am not big fan of IPOs when it comes to investing opportunities. For IPOs are literally an introduction to a stranger company.

Given my approach of buying safe stocks with a very long term perspective, I prefer to recommend buying stocks only once I have a fair degree of comfort about management quality and earnings capacity. Both of these are not really possible to gauge at the time of IPO.

This may mean buying the stock at slightly expensive valuations, but…in Buffett’s words…I prefer a wonderful company at a fair price than a fair company at a wonderful price.

Equitymaster - What’s your recommendation to IPO investors?

Tanushree - Investors looking to speculate on IPOs for listing gains should not be surprised to find a few of the stocks offering listing losses. This is bound to happen when loss making companies seek steep prices.

Investors looking for long term gains should evaluate the business model very carefully to identify some key metrics they would want to keep tracking. Poor performance on those metrics should be taken as a warning.

Most importantly, buying stocks at steep valuations during IPOs, could mean a compulsion to hold on to them for many years without meaningful returns.

(This article is syndicated from Equitymaster.com)

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