Moneycontrol Pro Panorama | Why value investors are no big fans of IPOs

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It is a well-known fact that Warren Buffett is not a big fan of IPOs. He is quoted as saying an IPO is like a negotiated transaction – the seller chooses when to come public – and it's unlikely to be at a time favourable to you.

In his 2016 annual Berkshire Hathaway shareholder meeting in Omaha, Nebraska, Buffett said: “You don’t have to 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 in India have proved like lottery tickets. A recent media report pointed out that out of 543 companies that tapped the primary market over 10 years, 62.2 percent no longer exist. Nearly 3 percent have dropped more than 80 percent and 4 percent have dropped between 50-80 percent. Around 15 percent of stocks are trading below their offer price.

Over three-fourths of companies that approached the market have eroded shareholders' value and trust. If one looks at the leverage that some HNI investors take to apply for IPOs, the damage is bigger.

One reason why IPOs are not preferred by value investors like Buffett is that the companies do not have public history, besides the fact that they tap the market when the environment is conducive for a good premium, in other words, there is little on the table left for new investors.

Since the financials of IPO companies are not available for public scrutiny before they are listed, there is a little track record to go by. Investors have only the DRHP. If the companies do not belong to reputed industrial groups, there is no way of knowing their track record.

Further, IPOs are launched with a lot of fanfare and marketing to suck in gullible investors. Despite awareness campaigns by SEBI, investors continue to be victims of market hype.

Take the case of new-age technology companies. Most of them have been non-performers from the word go. Even Zomato, the poster boy of new-age companies, has failed to live up to its hype.

The company capitalised on the favourable environment caused by the lockdown and raised funds from the market. With the economy opening up, the company has been hit on the operational front. Zomato’s restaurant partners are also revolting and have complained to the Competition Commission of India.

As discussed in this article, any adverse ruling will impact the financial performance of the company, which is still a long way off from posting operational profits. Little surprise then that Zomato is trading close to its lowest level since its listing.

Investors have rushed to IPOs because there were few other good investment avenues. Suyash Choudhary argues that yields from bond market have been low. That also accounts for the resilience of equity markets.

Investing in IPOs can be profitable provided one does thorough research. Over the last 10 years, 15 companies have given more than 300 percent return while 6 percent of the 543 percent stocks have posted returns between 100-300 percent.

Investing, be it in the primary or secondary market, has to be gauged by the same yardstick of valuation. Anything short of that is gambling.

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Shishir Asthana
Moneycontrol Pro