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If we discuss on IPOs, interests of company promoters and public investors normally act against each other. Investors will ideally benefit the most by investing in IPOs when secondary markets are at lows. In contrast, promoters will benefit the most by selling their shares through IPOs when markets are at record highs.

In this war of interests, company promoters always win because they are much intelligent (can even say 'crooks'), have money power, can hire expert professionals for best advise in their interests and so on. That is why you will see there is almost no IPO when markets are in bear phase whereas there are dozens of IPOs every month when markets are hovering at all time highs. We have seen 52 mainboard IPOs (excluding SME IPOs) in the year 2021 till date, including the ongoing three IPOs whereas the entire 2020 saw only 19 IPOs and the year 2019 witnessed only 17 IPOs.

So, why are the promoters rushing now to issue IPOs of their companies? The reason is when markets are low, they are forced to price their shares at low valuation multiples (P/E ratio) like 10 or 12 times EPS. Whereas, when the markets are booming they can easily price their issues at much higher multiples say 50, 60 or even 100 times EPS. Still these IPOs see bumper subscription especially from retail investors. Even loss making companies fetch excellent valuation during booming markets. Zomato is an example. This is the time the promoters reap gold by bringing IPOs of companies which are worth nothing more than garbage.

At the time of writing this piece, three IPOs are open. Let me discuss the prospects of them in brief:

Should you invest in current IPOs

Paytm

Very expensively priced. The company is still making losses even after so many years of establishment. Company is good, business prospects are good in longer term but what the company will be after 7-8 years from now has been priced in today itself. So, stay away. You will get opportunity to buy it cheap later on. It may give some listing gains but you can not put your money at risk just for a speculative gain that may or may not occur.

 

Sapphire Foods

Business is comparatively inefficient than already listed Devyani International. Continuously making losses. Don't know when profits will come. Already many companies in this sphere are listed at much better prices though they all are also very expensive at current prices. Entire IPO size is an Offer for Sale. It means the promoters are diluting their holding. The company does not need any money for its business. The company issued fresh shares on preferential basis at Rs. 505/- just two months back and now the same share is being offered to you at Rs. 1180/- You need to think if you want to fall prey to such an organized loot.

 

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Highly priced IPO. Business is good but profits of several years have been priced in today itself. You can buy it for long term only. If it gives you listing gains, it is only a speculation. Better is- Stay away, stay safe.

Protecting your money at current market euphoria must be your first objective. If your capital is intact, you can earn later. But if you burn your capital, you can never earn. You will surely get chances to earn later in these companies at much favorable valuation. We have seen it in case of IPOs that came during earlier booms.

Last but not the least

If you have applied to an IPO but want to withdraw your application now, you can do so till the time of closure of the IPO by visiting the platform through which you had applied to the IPO.

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Category Shares & Stock, Other Articles by - CA Mahesh Bansal 



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