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Home / Money / Behind the buyer’s remorse over IPOs

The euphoria over initial public offerings (IPOs) seems to have ended. It was only a year ago that brokerage firm Jefferies came out with a ‘buy’ recommendation on Zomato Ltd with a base case target price of 175 against the then market price of around 140. Recently though, valuation guru Aswath Damodaran said the stock was worth just 35 apiece.

Zomato had a blockbuster IPO in July 2021. The food-delivery start-up’s shares were subscribed more than 38 times, and spurted 64% on listing day.

Other IPOs, including those of Policybazaar and beauty firm Nykaa, also witnessed bumper subscriptions and up to 96% listing day gains. Arun Kejriwal, director, KRIS—an investment advisory firm, explains the reason behind the euphoria.

Stocks of many of these newly listed companies came crashing down on Dalal Street in the past six months.
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Stocks of many of these newly listed companies came crashing down on Dalal Street in the past six months.

“The IPO pricing mechanism in India was different till 31 March. Infinite funding was available to individuals. So, they even borrowed money and applied for IPOs. The oversubscription led to a premium being discovered on these stocks. Come 1 April, when the rules changed, you have seen that of all the IPOs that have hit the market, only in one IPO, the HNIs (High Networth Individuals) portion was subscribed in double digits,“ said Kejriwal.

Stocks of many of these newly listed companies came crashing down on Dalal Street in the past six months.

Today, Zomato is trading at around 46 level. Data show that Zomato is down 65% since its listing, while Policybazaar and Nykaa are also down 62% and 35%, respectively. Paytm and Life Insurance Corporation of India (LIC) are also down 54% and 23%, respectively, since their listing.

“At that time, led by Zomato, you had a spate of IPOs from firms which were making losses, were tech-platform driven. The valuations matrix was not conventional-based, but on what the companies said about their path to profitability. People are now realizing this and changing the way they apply for an IPO," he said.

What went wrong

Experts point out two factors for the stocks’ debacle. The first is the underlying fundamentals of the companies and the second is the macroenvironment.

“Last year we had ample liquidity, which drove up prices of these new-tech companies. Now there is crunch in liquidity and a continuous rise in interest rates , and so the shares of these companies are taking a hit," said Astha Jain, senior tesearch Analyst, Hem Securities.

Are they worth a look now?

Investors have started to focus on financials of companies.

“From the exuberance seen at the time of listing last year, Zomato is now unloved, having underperformed peers on a year-to-date basis. Blinkit acquisition elongates path to profitability and despite management guidance on a break-even in food delivery, investors are not giving it much benefit of doubt. We think this makes for a great case for long-term investors to ‘buy’ the stock,“ Jefferies said in a note recently.

Kotak Institutional Equities Research last month had a ‘buy’ rating on Nykaa, citing healthy growth trajectory. However, in a recent report, IIFL Securities had a ‘reduce’ rating on the stock, citing shrinking margins due to higher marketing investments.

As for Paytm, Dolat Capital Market Private Ltd has come out with a buy rating, while Motilal Oswal Financial Services Ltd had a buy rating on LIC and Kotak Institutional Equities had a buy rating on Policybazaar.

According to Jain, it will take some time for these companies to get their mojo back. “The fundamentals of these companies need to improve per se. And secondly, if the macro environment again becomes viable like in 2021, then we can see some sort of rise in the prices. Till the time they will be moving in a particular range," said Jain.

Lessons from the fall

Tarun Birani, founder, of TBNG Capital and a Sebi-registered investment adviser, says , “FOMO, or the fear of missing out, is one of the biggest learnings from the stock markets. If we don’t follow it and stick to our financial goals, it would have always benefited us."

The other big lesson for investors is: Beware of the frothy valuations of some of these new-age tech companies.

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