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Tuesday 9 November 2021

The IPO Frenzy


The IPO market in India is sizzling. Some notable IPOs that are open now or was issued in the recent past. But what has caught the imagination of the investors are the new-age tech startups. The notable ones are as follows:

  • One 97 Communications (Paytm)
  • PB Fintech (Policybazar)
  • Fino Payments Bank
  • FSN Ecommerce (Nykaa)
  • CarTrade
  • Zomato

Let me state it upfront. I believe that the Indian new-age IPO market is in a bubble. A big one at that. And promoters are rushing head over heels to bring their loss-making enterprises to market to secure their own futures. No one is questioning how much of the IPO is an OFS (offer for sale) where the existing promoters and investors are dumping their own holdings onto public shareholders.

But are they to blame? Why are investors ready to pay 30-80 times sales for companies which are not profitable, neither have a path to profitability or where competition is so stiff that whatever meagre profits are being earned can disappear in an instant from external competition or regulation?

The answer to that probably lies in the fabulous run of big tech (FAANG etc) in the US. Indians have seen the phenomenal performance of Amazon, Facebook, Google etc and feel that this time they can make money from such new-age tech stocks. After all, wasn’t Amazon loss-making for a very very long time?

There are two fundamental problems with the Amazon example. And nearly always, Amazon is the example 😊

  1. Amazon wasn’t doing very well on their retail front but AWS, which was something no one knew would come along, came in and started spewing cash with a vengeance. That cash is what helped the stock reach the commanding heights it has done today.
  2. Amazon is and always was a dominant global player which could use its scale to reduce its cost. It built its business on being a low-cost, consumer-friendly operation that passed on a large part of its scale-gains back to the customer thereby creating a virtuous cycle. People got low prices because of Amazon’s scale and more people bought more goods on the platform which in turn increased its scale. But even this is not enough, because a lot of other players did the same in the offline world – like Costco, Walmart etc. Walmart tried replicating the same in the online world as well but wasn’t very successful.

Look at the Big Tech stocks – can you think of normal lives without Google (search, youtube, Gmail, maps, translate)? Is any of India’s tech companies as dominant in its space as Facebook or WhatsApp? Or have fierce loyalty as Apple? Do we have a Netflix equivalent or a Tesla? Nearly all the US Big Tech have global dominance.

When you dissect each business that is IPOing in India today, you realize that none of these businesses is new. They have been in business for a number of years and are still struggling. Their claim-to-fame is the media PR, which is probably paid for by the companies themselves, and mainly deals with how much money one has raised from its investors. Can you live if Paytm is down for a day? Of course, you can. Most probably you won’t even miss it. Can Zomato be profitable if labour regulations harden or if (and when) restaurants start their own ordering app?

And in the typical incentive-caused bias of media and sell-side analysts come in. Nobody wants to put their neck out and say that these IPOs are priced ludicrously. Investors are happy if they get an allotment and get an initial pop. No one is looking to buy and hold these businesses for the next 10 years. In fact, for a lot of promoters, bringing their company to market is the end-game and not really a step along the long and arduous journey of building an institution.

I am not someone who obsesses over valuations. I think good things are always expensive. But paying a scaringly high price for buying something where the promoters are willingly selling and which have a questionable business model with a very hard-to-fathom path to long term profitability scares the hell out of me.

Since I come from a middle-class background and believe that capital is sacred and irreplaceable, I am very sceptical about the entire IPO scenario in India today. The bubble is there, it is acknowledged in hushed tones but no one wants to leave the party. For the simple reason that no one knows if the party s nearing its end or just beginning. I am not applying for any of these overpriced and overhyped IPOs as of now. I am ready to forego of listing gains and looking foolish (in reality, can’t actually be sure if I am foolish or not!!). 

But let this be my caution to you. Participate in this frenzy only if you know what you are doing.

This article appeared in The Economic Times


  1. i am complete agree with writer. all these new age companies does not have any competitive advantages in their respective business. promotors and initial investors are offloading their shares to publics. similar was happen in dotcom bubble and 2008 reliance power IPO.

  2. little appreciated fact that amazon had tremendous OCF - because of the float. You get money from customers upfront and pay after a week to sellers with a 15-20% docked for platform commission which provided it tremendous leeway.

    1. YEs, but let's face it, online retail is a very low margin business and practically no company in the world (probably excepting Alibaba, in a sort of regulated market) has ever done exceptionally well. And the bulk of Amazon's stock market valuation is driven by the profits and cashflows generated by AWS.

  3. You have put the IPO Scenario in prespective