IPO frenzy is on | What should you do?

March is going crazy with IPOs. There is a long list of companies coming up with initial public offer. to raise funds. So, you must be wondering, why is it that so many companies are lining up for money at the same time. Let's discuss this.

There could be various reason to it but following are also very obvious reasons:

1. Surging retail participation in equity markets - This is really good for companies planning an IPO as this can give easy exit to Private Equity investors and at times gives opportunity of encashing high valuations to the promoters also.

2. Response to recent IPO listing - This is a confidence booster. Almost all the recent IPOs were oversubscribed and listed at bumper price, way above its IPO price, which was already overvalued in most of the cases.

Let's have a look at current price of recently listed companies.  

Source: StockEdge

We can see that most of the companies are trading at a price which is lower than listing price in most of the cases and even below offer price in some cases. Those who didn't sell the stock on the listing day are sitting at unrealised loss and I don't see this status changing in near term.

Now, let's understand why is this happening. Companies are coming up with bizarre valuations and it is the above list which is giving them confidence. Better to understand this with one example. IPO of Anupam Rasayan is going on and listing is scheduled for 24 March 2021.

Anupam Rasayan, incorporated in 1984, is a speciality chemical manufacture based out of Gujarat. This IPO is oversubscribed by 44 times. This is very usual these days, every other company is getting this kind of response. No big deal, right?

Let's do some number crunching and discuss few key point below.

1. Promoters bought the stock at Rs. 227.17 per share in the last one year. So, what has changed in one year that now company is offering the share at Rs. 555. This is a BIG RED FLAG.

2. Object is not expansion. Object of the fund raising is repayment of debt and general corporate purpose. If we see this in isolation, it might be ok but seeing this with above, we can sense that management wants to encash current bull market by offloading its shares at higher price.

3. PE multiple of 95 times TTM EPS. This valuation is ridiculous to me. Company is comparing itself to PI Industries (65 times PE), Naveen Fluorine International (32 times PE), Astec Lifesciences (43 times PE) and SRF (30 times PE) in it Red Herring Prospectus. SRF is almost 15 times bigger than Anupam Rasayan and its trading at 30 times PE. 

Above 3 points are sufficient for an investor like me to distant myself from this IPO but I will not be surprised if this will also list at a price higher than offer price. And I will not be surprised if the stock price will very soon go below the listing price and even offer price within few months. 

So, my advice to retail investors would be, please do your homework, otherwise you will be out of the market soon.

Please share your views in comment box below.

About author: 

Manish Negi is a Chartered Account and an experienced auditor. 

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