'Rolling your Stones' perfectly in the IPO game

If there ever exists a pantheon of the world’s greatest musicians, the reclusive Charlie Watts, the iconic drummer of Rolling Stones, will surely preside over it. The band which, apart from being one of the greatest artistes in the history of music since its conception in 1962, is an institution in its own right, having seen innumerable socio-cultural and musical landscapes change over the decades and pioneering the heavy, gravelly, and defining sounds of hard-rock for generations to come. 

Watts, one of the earliest and longest (1963-2021) members of the quartet, passed away on August 24 at the age of 80. Widely recognised as a passionate proponent of jazz and one of the most influential drummers of all times, Watts’ troubled yet inspirational life held many kernels of learnings. From steadily staying put with the Rolling Stones for the entirety of his career, which lasted 58 years to doubling up as a graphic designer for the band’s cover jackets, he indeed left behind a permanent musical legacy.

Endurance, however, might be the last word that comes to mind while looking at the waning investor interest as we approach September in the ongoing 2021 Indian IPO (Initial Public Offer) extravaganza. 

While the IPO fundraising touched a 13-year high this year, with the total funds raised so far already reaching $8.8 billion and set to surpass the last 3 years cumulatively with a record-high of $11.8 billion, 6 out of 8 listings in the market so far this month have been lukewarm and low, perhaps indicating investor fatigue, like in the case of the much-anticipated CarTrade Tech, which closed 7 percent below its offer pricing on listing day. 

So, what should you make of the IPO scenario as of now? Is it advisable to waddle into these waters now, with giant listings like LIC, Nykaa, and Paytm coming up? Let some of this band's seminal sounds, particularly those popular thanks to Watt’s magical drumming skills, help you navigate and understand the intricacies and do’s and don'ts of an IPO!

Paint it Black (1966)

I've seen people turn their heads
And quickly look away
Like a newborn baby
It just happens everyday

Given the current IPO rollouts, it’s literally and metaphorically every day that we see company listings happen on the market. So far, around 34 companies have filed their offer documents with SEBI for approval in 2021, along with 50 more startups and companies that have publicly announced their intention of bringing an IPO by the end of this or early next year. But around 60 percent of investors look to take part in IPOs for the sake of listing gains alone, wanting to make a quick buck by quickly selling the shares at a price higher than the listing price, instead of putting their skin in the game and staying long-term, choosing instead, to stray away from the market within a matter of days or weeks. 

Takeaway: As a strategy, entering the market for just short-term gains is not advisable for small-ticket retail investors, given the high risks and the unlikely possibility of accurately timing the market. Approach the market to stay invested in the long horizon if you want to make steady returns. 

Stray Cat Blues (1968)
Oh yeah, you're a strange stray cat
Oh yeah, don'tcha scratch like that
Oh yeah, you're a strange stray cat
Bet your mama don't know you scream like that
I bet your mother don’t know you can spit like that.

As lucrative as they might seem, and as overwhelming the FOMO (Fear of Missing Out) on the positively rallying market sentiment, IPOs, at large, remain a mystery for investors. There are many reasons for that- the disproportionate information balance about the to-be listed company between sellers and investors, lack of market scrutiny, exorbitant prices, and paucity of details about their financials and management for accurate analysis. 

Per data, of the 207 IPOs in the last 10 years, only 21.26 percent were multi-baggers, yielding over 100 percent returns. Strikingly, 45.89 percent yielded negative returns in the long run! Retail investors might think of IPOs as a profitable opportunity, but IPOs can turn out to be scratchy, strange, and dangerous cats for their portfolio!

Takeaway: As Buffett reiterates, “There is really worry about what’s really going on in IPOs. People win lotteries every day but there's no reason to let that affect your investing strategy at all". IPOs can, indeed, turn out to be a gamble, if the underlying company has not been comprehensively and objectively analysed, which is a big bet for small investors.

Gimme Shelter (1969)
Ooh, see the fire is sweepin'
Our streets today
Burns like a red coal carpet
Mad bull lost its way

Remember the Zomato IPO last month? While the food delivery behemoth took the market by storm as retail investors oversubscribed it almost 7 times, the company had already been in red for the longest time now, with its net loss widening to Rs 356 crore, as per its first earnings disclosure since the IPO. In fact, the company has categorically declared that it will remain a loss-making entity for some more time to come.

Valuation expert Aswath Damodaran worked out a realistic valuation of Zomato shares at Rs 41/share, which is almost half of the actual listing price of the stock, which was in the range of Rs 72-75/share. In fact, if experts are to be believed, loss-making entities backed by strong investor confidence often look at IPOs as a cash-infusion opportunity to sustain the business, without having a proven business or revenue model to generate a steady income stream in the long run. 

Takeaway: Always consider the company's financials objectively and correspond the same with its market valuations before taking the plunge. The high values may seem very enticing in the short run, but remember, in the long run, the company’s valuation is bound to zoom back to normal or even lower. 

Start it Up (1981)
If you start it up
Kick on the starter give it all you got, you got, you got
I can't compete with the riders in the other heats
If you rough it up
If you like it you can slide it upSlide it up, slide it up, slide it up

And finally, if you have endeavoured to step inside the world of IPOs, make sure you make the most of it. Or as they say, rough it up! Make sure your IPO investments complement your overall financial goals and are not just a segue into quick profit-booking. Since the risk of losses runs high, don’t invest with borrowed funds or emotional build-up, paying higher than reasonable prices. Check out the second and third days of the IPO for moderated prices and public reactions.