IPO Frenzy In India – Are Valuations Too High?

For nearly a year, the rush among companies to announce their initial public offerings (IPOs) and among investors to subscribe to them has been at its pinnacle in India. This, on the one hand, paints a gleaming picture of the Indian stock markets, but it also raises a red flag in terms of the exorbitant valuations the companies have acquired throughout this period. So, are the valuations justified, or is it simply a bubble ready to burst? Let’s delve a little deeper.

It is critical to consider the elements that have contributed to this IPO boom. The changes in the regulatory framework, as well as the macroeconomic situation, have given companies and investors the push to go ahead with the IPOs. With the government implementing strict lockdowns around the country to halt the spread of the pandemic, customers felt more confident in shifting their purchase habits away from traditional brick and mortar establishments and toward e-commerce. As a result, e-enterprises account for the majority of IPOs and DRHP filings. However, the IPO market surge is not limited to e-commerce and technology start-ups.

Retail Investors Want to Ride the Wave

Access to stock markets has become easier for regular investors as internet and smartphone adoption has increased. Many people have opened accounts and begun investing. This is supported by the fact that the capital share of retail investors at the NSE increased from 39% in FY20 to 45% in FY21. Moreover, there has been a quick increase in investor Demat accounts. Due to the continued lengthy bull run, market sentiment has been strong, which loss-making corporations will naturally use to ensure money is poured into them. Furthermore, the Chinese government’s tough stance against their tech giants has worked in India’s favor. As seen by the strong FII inflows into India, there has been a change in global capital mobility from China to India.

The relaxations in SEBI’s Innovator’s Growth Program have been perhaps the most significant and widely discussed development. The revisions have simplified the listing procedure for firms by cutting the period for holding pre-issue capital in half, from 2 years to 1 year.

Are Valuations Too High?

We believe that the market’s nature has naturally pushed valuations to the higher end of the spectrum. However, are the valuations so high that they qualify as a bubble? 

No, we don’t believe so. Let’s take a look at some of the most talked-about tech companies. The business model of such companies where the platform requires regular servicing, the nature of the expenses in itself is current. This means that they have to be met immediately. This is in complete contrast to companies requiring heavy capital expenditure which are expensed over several years. Thus, rather than the strength of the financial sheets in previous years, the runway time and unit economics must be considered. Thus, high valuations are not insane since they take into account the customer’s comprehension of the business concept. After all, there is a reason why, even though both Zomato and Paytm are loss-making businesses, one got the requisite investor interest and the other did not.