Indian New-Age IPO Market Is In A Massive Bubble, Warns Investment Advisor

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India is at the cusp of the IPO revolution. The overwhelming success of Zomato IPO, Nykaa IPO is attracting the eyeballs of institutional investors and they are pushing their portfolio startups for IPO. Retail investors are excited from the IPO gains clocking 80% -100% within a few days of listing.

Surprisingly, all actions are taking place at the time when a sizeable number of fund managers and investment advisors are repeatedly pressing warning bells to alert investors who are gung-ho about startup IPOs.

Yesterday, Dazeinfo mentioned how Rakhi Prasad, one of the renowned fund managers, while speaking to Bloomberg, issued an alert to investors in regards to Paytm IPO. Today Abhishek Basumallick, Chief investment advisor – Intelesence Capital, expressed his concerns about the increasing number of startup unicorns floating their IPO.

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Basumallick believes that the Indian new-age IPO marketplace is in a big bubble.

In a write on ET, he explains that the IPO bubble in India is a result of over-ambitious startup unicorns’ promoters who are racing to sell their losses-making businesses to people in order to secure their futures. No one is questioning how much of the IPO is an OFS (offer for sale), which is quite critical to understanding the sustainability plan of a startup. This is where existing investors and promoters dump their holdings onto unsuspecting and over-excited public shareholders.

Many of you may question that who should be blamed ultimately? Also, why would investors pay 30-80 times sales to buy companies that aren’t profitable, have no path to profitability, or are indulged in a highly competitive scenario where any profits earned can be lost to survive in a cut-throat market scenario?

Basumallick, a value investor with nearly two decades of stock market experience, continues to explain that it is probably because of the phenomenal run of Big Tech (FAANG, etc.) in the US. Indians have witnessed the incredible performance of companies like Amazon, Facebook, and Google, and believe that it’s time for them to make money with these new-age tech stocks.

It’s important to note that many startups, including, Amazon continued to incur losses for some time. And that’s why many retail investors in India believe that it could be the same case with loss-making Indian startup unicorns going for IPO.

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But Basumallick argues that such thoughts have a lot of incompatibility issues when considered in the Indian scenario.

Startup IPO Bubble: Issue vs Issues

Basumallick explains that basically there are two fundamental problems with Amazon’s example:

  • Amazon was not doing well in its retail business, but AWS, something that no one expected, arrived and began to spew cash with a vengeance. This cash was what enabled the stock to reach such high heights.
  • Amazon has been a global leader that can use its size to lower its costs. Amazon built its business around being low-cost and consumer-friendly. This allowed it to pass on large amounts of its scale-gains back towards customers, creating a vicious cycle. Amazon’s size allowed shoppers to buy products at a very low prices, hence more people purchased more products on the platform. This in turn led to Amazon’s increasing scale. However, this isn’t enough as many other players in the offline market did the same thing such as Costco and Walmart. Walmart attempted to replicate the same online, but was unsuccessful.

He also argues that those who defend the thought of startup IPO by giving examples of Amazon and Google tend to forget the fact that each of those companies already have had a global presence at the time of IPO. Besides, their offerings are perfectly aligned with our daily life.

To add weight to his thought on the startup IPO bubble, he explains that how ubiquitous tech company Google is in India.

He throws a set of questions in order to present a fair comparison:

  • Can you imagine normal life without Google (Google Search, YouTube, Gmail and Maps), or Google Translate?
  • Is any Indian tech company as dominant as WhatsApp or Facebook, or do they have loyal customers like Apple?
  • Is there a Netflix or Tesla equivalent?

He continues to explain that nearly all of the US Big Tech companies have global dominance. However, when it comes to IPO-bound Indian startups, none of them have a unique offering. Also, despite being in the copy-paste business for many years, all are still struggling. Their claim to fame is their PR push, which was probably paid for by them only. And, it mainly depends on how much money they have raised from investors.

Is it possible to live with Paytm down for one day? Of course, you can. You won’t likely even notice it. Is Zomato a viable business model if there are tighter labour regulations or if and when restaurants create their own ordering apps?, asks Basumallick.

The problem is, no one wants to be tagged with a party spoiler by saying that these Indian IPOs have ridiculously high prices. Investors will be happy if they receive allotment and initial listing gain. These businesses are not here to be held by the investors for 10 years. Promoters often view floating their IPO as an exit and instead of being a part of the long and difficult journey of building an institution.

In his final statement, Basumallick clarifies that he doesn’t obsess about valuations and believes that good things should always be expensive. 

But at the same time, he also leaves some food for thought. He openly expressed his concerns that people will be tricked into buying something that promoters are adamant about selling at a highly unreasonable price despite the fact that they have no visibility on road to profitability or sustainability without investors’ money.

I’m skeptical of the current IPO situation in India. There is a bubble. 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 is nearing its end or just beginning,” says Basumallick.

Whatever be the case, it appears that strategic investors are participating in IPO for listing gains but don’t have much confidence in most IPO-bound startup unicorns for long terms. Analysts, fund managers, and investment advisors may not be too vocal about the future prospects of these startups, but irk and concerns that are being discussed in the galore can easily be felt and heard. As many more Indian startups are gearing for their IPO in the coming weeks, it’s high time to make an informed decision, instead of participating in such IPOs out of FOMO (fear of missing out).

ViaET

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