Short Call | IPO obsession: Valuable insight or Overblown gamble? RailTel, Gulf Oil, Globus Spirits in focus

An IPO situation more closely approximates a negotiated deal. The seller decides when to come to market, and they don’t pick a time that’s necessarily good for you - Warren Buffett

Indian markets are sporting lofty valuations despite subdued earnings growth. Amid this, the Indian IPO market has witnessed a notable upswing, driven by strong market sentiment. Retail investors are turning to Initial Public Offerings (IPOs) as a potential goldmine.

Not just domestic investors but even FIIs are more enthusiastic about IPOs as a Societe Generale (SG) report revealed that foreigners acquired more than $6 billion of stocks on the primary market this year, the highest since 2021.

Going by the raging returns delivered by SME IPOs thus far, would make anyone believe that '21 din me paisa double' is no fraud scheme. Notably, the BSE SME IPO index has surged 136% this year, vastly outpacing the Sensex’s 14% gain.

If the outsized returns on some stocks are feeding the frenzy, the magic of IPOs is also being actively fuelled by hype, social media buzz, paid promos by influencers and association with high-profile investors, be it prominent market names or even social celebrities like Virat Kohli, Shilpa Shetty whose presence create an illusion of credibility to IPOs.

Promoter equity offloads, once viewed as red flags, are now overlooked as investors chase after the latest hot issue. A tantalizing grey market premium (GMP) further ignites FOMO, leading to oversubscription, even when cash flow considerations are ignored.

The IPO of Resourceful Automobile, which runs a modest operation with just two Yamaha showrooms and eight employees, attracted bids worth nearly Rs 5,000 crore—420 times its Rs 12 crore target, despite its relatively small scale and past financial losses. It’s not an exception. Other IPOs from firms burdened with debt or lacking a standout outlook have also received enthusiastic responses.

The situation is concerning if you look at the response from the Securities and Exchange Board of India (SEBI) which has issued warnings about misleading MSME IPO promotions.

The market regulator is concerned that some promoters are painting an overly optimistic picture to entice investors. For those still tempted to dive into the next IPO, remember Warren Buffett’s sage advice: “An IPO situation more closely approximates a negotiated deal. The seller decides when to come to market, and they don’t pick a time that’s necessarily good for you.”

Gulf Oil Lubricants India ( Rs 1,479.75, +4.52%)

Shares rose after Systematix initiated coverage and assigned a target price of Rs 1,700.

Bear Case: The lubricant industry is flush with competition, which could have a bearing on the company’s market share, rendering prices competitive.

Bull Case: Its market share in the lubricants segment is expected to grow consistently, supported by the company’s strategic entry into the electric vehicle (EV) segment and DC cooling liquids. These initiatives are seen as key drivers for long-term growth.

RailTel (Rs 497.95, +1.46%)

Bagged the 'Navratna' PSU status.

Bull Case: More than a status symbol, PSUs with the Navratna tag can invest up to Rs 1,000 crore without prior government approval. Navratna PSUs also can allocate around 15 percent to a specific project or 30 percent of their net worth over an entire year, as long as it is under the Rs 1,000 crore limit, which bodes well

Bear Case: Railtel's order book is more skewed towards non-railway projects, while its railway-related projects only make up 22 percent of the total order book. Additionally, the firm said Q1FY25 projects executed largely had low margins. If the firm continues to bag projects with low margins, it could have a serious impact on the bottomline.

LG Balakrishnan & Bros (Rs 1,494, +8.4%)

Shares hit 52-week high on heavy volumes

Bull Case: HDFC Securities remained bullish on the medium-term prospects of the company due to strong domestic and export demand. The company's entry into industrial chains and RSAL Steel Pvt Ltd takeover completion create a positive outlook amongst analysts. It plans to raise funds through preferential allotment in Q2 with the promoter aiming to increase their stake to 39-40 percent.

Bear Case: Increase in insurance costs and shipping challenges in European exports due to the Russia-Ukraine war. Competitive pressure in the US subsidiary has resulted in higher operating expenses. Stiff competition and volatility in commodity prices may cause profit margins to fluctuate.

Globus Spirits (Rs 1,114 | +3.8%)

Motilal Oswal MF buys stake

Bull case: Globus Spirits shows strong growth with revenues over Rs 3,000 crore and consistent operating margins above 20 percent. The company's turnaround in its IMFL segment boosts its profitability prospects further.

Bear case: Declining operating margins below 12 percent could hurt profitability. Project delays, rising costs, unexpected debt, or adverse regulatory changes could weaken Globus Spirits' financial stability and capital structure.

(With inputs from Veer, Zoya, Neeshita and Lovisha)