The question that many retail investors are asking is – should they invest? Let’s simplify their decision, shall we?
Originally published on 15th July, 2021 by
It’s the dawn of a new era for Indian equity markets, as “new age”, loss-making businesses begin to list themselves on the bourses. And, true to hype, the first day of Zomato’s 9,375 Crore IPO witnessed an oversubscription of nearly 3X.
The question that many retail investors are asking is – should they invest? Let’s simplify their decision, shall we?
First, we must understand that we are in completely uncharted territory with these IPO’s. Traditional valuation metrics based on profitability fail in these cases, because these businesses are yet to turn a profit. The question is, why are so many people buying into an unprofitable company?
The short answer is, they are buying into the future. Outstanding examples such as Twitter and Amazon clearly prove that if you have a massive, engaged retail client base in place, you could, with some luck, eventually make your business profitable. Twitter turned its first profit more than 5 years after listing. Amazon famously burned cash for 17 quarters after hitting the stock exchange for the first time.
That “pivot” from burning cash to generating a surplus is both non-guaranteed and unpredictable, though. And therein lies the problem – what investors are doing is, betting that these businesses will become profitable at some point. What if they don’t? Well, the simple answer is – it’ll all come tumbling down.
Take Zomato, for example. What if the restaurant lobby puts brakes on its progress? What if a bigger, better competitor comes in and usurps it? What if skeletons come tumbling out of the closet, Foodpanda style? The number of “what-ifs” that exist between today’s cash burn and tomorrow’s profitability are numerous.
Add to that the fact that there’s no real way of ascertaining the a “fair value” for these new age issues. How can an investor know for sure that they are buying “growth at reasonable price”? How brokerage houses are assigning price targets to such shares remains a mystery.
Don’t be misled by the fact that these IPOs are mostly “fresh issue” ones (this is usually a good thing). For example, in Zomato’s case, 9000 Crores out of 9375 Crores is a fresh issue of shares, whereas 375 Crores is an “offer for sale” by Info Edge. The unfortunate caveat is that this isn’t really growth capital. It’s survival capital. The company burned through nearly 2,500 Crores of cash in FY’20 (yes, you read that right!).
Also, a lot of so called “investments” that are taking place during the IPO are really speculative in nature – that is, for listing gains only. Add to the fact that the issue will be massively oversubscribed, and one really begins to doubt whether its all really worth it.
Bottom line? New-age IPOs must be taken with a pinch of salt. Don’t jump in because of FOMO. These IPOs are mostly speculative trades, not investments. Am I saying that you should not buy into these shares at all? No. It’s quite likely that many of these businesses will complete that “pivot” into profitability at some point. Use your intelligence and rationality to make wise “investment” decisions instead of joining the frenzied, feverish hordes of speculators. If you believe in the future of these companies, allocate a fixed portion (say, 5%) of your portfolio to them and build a portfolio allocation in a disciplined, structured manner by investing a fixed rupee sum of these shares every month for the long term – much like a mutual fund SIP. And then – play the waiting game to the hilt!