Let me state it upfront: I believe that the Indian new-age IPO market is in a bubble. A big one at that. And promoters are rushing head over heels to bring their loss-making enterprises to the market to secure their own futures. No one is questioning how much of the IPO is an OFS (offer for sale), where the existing promoters and investors are dumping their own holdings on to public shareholders.
But are they to blame? Why are investors ready to pay 30-80 times sales for companies that are not profitable, don’t have a path to profitability or where competition is so stiff that whatever meagre profits are being earned can disappear in an instant from competition or regulation?
The answer to that probably lies in the fabulous run of Big Tech (FAANG, etc) in the US. Indians have seen the phenomenal performance of companies such as Amazon, Facebook and Google and feel that this time, they can make money from such new-age tech stocks. After all, wasn’t Amazon loss-making for a very very long time?
There are two fundamental problems with the Amazon example — and nearly always, Amazon is the example.
- Amazon wasn’t doing very well on its retail front but AWS, which was something no one knew would come along, came in and started spewing cash with a vengeance. That cash is what helped the stock reach commanding heights.
- Amazon is and always was a dominant global player that could use its scale to reduce its cost. It built its business on being a low-cost, consumer friendly operation that passed on a large part of its scale-gains back to the customer, thereby creating a virtuous cycle. People got low prices because of Amazon’s scale and more people bought more goods on the platform, which in turn increased its scale. But even this is not enough, because a lot of other players did the same in the offline world – like Costco and Walmart. Walmart tried replicating the same in the online world as well but wasn’t very successful.
Look at the Big Tech stocks. Can you think of normal lives without Google (Search, YouTube, Gmail, Maps, Translate)? Are any of India’s tech companies as dominant in its space as Facebook or WhatsApp, or have fiercely loyal customers as Apple? Do we have a Netflix equivalent or a Tesla? Nearly all the US Big Tech have global dominance.
When you dissect each business that is bringing out IPOs in India today, you realise that none of these businesses are new. They have been in business for a number of years and are still struggling. Their claim-to-fame is the PR push — probably paid for by the companies themselves — that mainly deals with how much money one has raised from investors. Can you live if Paytm is down for a day? Of course, you can. Most probably you won’t even miss it. Can Zomato be profitable if labour regulations harden or if (and when) restaurants start their own ordering app?
Nobody wants to put their neck out and say that these IPOs are priced ludicrously. Investors are happy if they get allotment and get an initial pop. No one is looking to buy and hold these businesses for the next 10 years. In fact, for a lot of promoters, bringing their company to the market is the end-game and not really a step along the long and arduous journey of building an institution.
I am not someone who obsesses over valuations. I think good things are always expensive. But paying a scaringly high price for buying something that the promoters are willingly selling, and which has a questionable business model with a very hard-to-fathom path to long-term profitability, scares the hell out of me.
As I come from a middle-class background and believe that capital is sacred and irreplaceable, I am very skeptical about the IPO situation in India today. The bubble is there. It is acknowledged in hushed tones. But no one wants to leave the party. For the simple reason that no one knows if the party is nearing its end or just beginning.
I am not applying for any of these overpriced and overhyped IPOs as of now. I am ready to forego listing gains and look foolish. But let this be my caution to you: Participate in this frenzy only if you know what you are doing.
