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IPO Frenzy Continues
Jun 22, 2017

It's raining IPOs. Fund raising for the year has crossed Rs 100 billion mark. That's only happened twice before!

Buoyancy in the markets has given fundraising a boost. Positive sentiments have attracted investors in hordes. And retail investors are active like never before, taking oversubscription to insane levels. With issues like Avenue Supermarts (DMart) and CDSL , oversubscription of 100 times or more seems to be the new norm.

And this might just be the beginning. As per The Economic Times, at least fifty more companies are likely to come out with IPOs this year, raising between Rs 400 and Rs 600 billion. To put that in perspective, in 2007-08, 84 companies raised Rs 410 billion via IPOs.

The markets were buoyant then too, trading at an average PE of 21 times. Today, the PE is 22 times.

The sense of deja vu is strong. And that's not a good thing...

Following the 2007-08 IPO frenzy was a 60% drop in the Sensex, and a similar fall in index valuations.

More than 70% of the IPOs listed in 2007 and 2008 are in the red, even today when the Sensex is at lifetime highs.

Will this time be different?

We fear history will repeat, with retail investors witnessing a massive erosion of their wealth. Indian equity markets are trading around lifetime highs. Overcapacity, high debt, depressed earnings...there is little fundamental support to sustain these valuations. Liquidity and sentiment are driving this market. But neither of these can be counted upon. The recent addition of China in MSCI, which could lead to an outflow of FIIs in India, is a blunt reminder of the slippery terrain we're on.

Should You Stay Away Then?

While we have always been cautious on IPOs, we do not believe you should completely ignore this space.

For every Reliance Power-like issue, there have been issues like Maruti, TCS, and Jubilant Foodworks Ltd (with returns over 4,000%, 1,000% and 500% respectively) that have made investors rich.

The percentage of such issues, unfortunately, is very low (Do refer to the IPO performance snapshot). The odds are stacked against a retail investor.

A careful evaluation of each IPO on its merits - its fundamentals, and most importantly, valuations - is the only way to spot future multibaggers. To learn how to navigate the treacherous world of IPOs, do read our special report on finding money-spinning IPOs.

Data Source: Prime Database, Business Standard

Note: 2017 data includes IPOs of GTPL Hathway (Subscription Required) and AU Small Finance which are yet to close

This Chart Of The Day was published in The 5 Minute WrapUp - The 'Multibagger IPOs' You Should Be Betting On

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