IPO Investment in India: Lessons from Market Euphoria and Reality

Satyendra Bhardwaj

A few months ago, a big-ticket IPO (Initial Public Offer) was set to hit the Indian share market. There was euphoria all over—carefully crafted and unleashed by the management of a new-age company, hailed as the torchbearer of the “new economy.”

A 21-something boy who used to travel with me in a shared car was gung-ho about this IPO investment in India. During one of our Noida to Gurugram rides, he exclaimed, “You must also invest in this IPO. Everyone is using the service of that financial behemoth.”

While I was among the minority not using its services, he did have a point.

The Gen Z Mindset Towards IPO Investments

Fresh out of a top-tier B-school and flush with money from a stellar placement, he had little patience for what he called “conservative thinking”—like analyzing a company’s financials. For many in Generation Z, terms like GMV sound exciting, while traditional metrics like P&L are often ignored. The eternal truth—the bottom line—rarely gets the attention it deserves in such IPO investment decisions.

The Reality Check: When Hype Fades

About 15 days later, when we met again, his enthusiasm had faded. The IPO he had heavily invested in was down nearly 40 per cent. He had suffered a significant loss.

Sensing his disappointment, I simply told him that he wasn’t alone. But going forward, he should evaluate the financials of a company before investing in an IPO, instead of getting carried away by market hype. After all, no one gets it right from day one—we all learn through experience.

IPOs: Wealth Creators or Wealth Destroyers?

It’s important to note that IPO investments in India don’t always lead to losses. There are plenty of examples where IPOs have delivered impressive returns. However, more often than not, IPOs have turned out to be wealth destroyers rather than wealth creators.

Research shows that out of 543 companies that raised funds through IPOs over the last decade, more than 62 per cent no longer exist. Around 7 per cent have lost between 50 to 90 per cent of their value, and 15 per cent are trading below their issue price. In essence, only about 16 per cent of these companies have truly created wealth for investors.

Changing Trends in Recent IPO Investments

Interestingly, the trend appears to have shifted in recent times. Looking at recent IPO investments in India in 2022, six out of seven mainboard offerings have delivered positive returns ranging from 21 to 176 per cent (as of April 14, 2022).

On the SME board, 27 companies raised funds, and 19 of them generated returns between 2.9 per cent and 220 per cent.

The Timeless Insight for Investors

This brings us to a timeless observation often attributed to legendary investor Warren Buffett—that the seller decides when to enter the market, and that timing may not always favor buyers, especially retail investors.

But is that always true when it comes to IPO investment in India?