Should You invest in an IPO? Case — Paytm
What is an investor trying to achieve through IPOs?
For all, there lies a simple assumption basis which is the expectation from IPO which is
IPOs are a value proposition where the offer price is at discount.
- is this really true?
This also has a psychological binding for a few inexperienced investors who perceive the IPO offer price as a base price below which it shall never trade.
Are these assumptions correct?
What if it is wrong?
How will it impact your overall portfolio?
To understand this let us take a look at an IPO that opened for subscription on 8th Nov 2021: Paytm.
At Rs. 18000 Cr. Paytm was easily India’s biggest and much-awaited IPO. It was also India’s largest & the first digital payments company to go public.
IPO Offer
Offered Price band: Rs 2080–2150 per share
Lot Size: 6 shares
To put things into perspective, it may be worth noting that Paytm IPO was subscribed to 1.66 times by retail investors.
Now, against all expectations, Paytm got listed on 18th Nov 2021 at Rs. 1955 only which was at a discount of 9%. Price went further down in days to follow.
What does this imply?
Short-term investors:
- Some have either booked a loss or exited.
- Some would still be invested in the hope of making recovery.
- Some Bravehearts would have bought more to average the price and now thinking of what to do with all these shares at 25% of the price.
Long-term investors:
It is basically a doomed investment. A 75% loss in the capital so far only implies that a 400% increase from the current price would only help recover the base invested capital.
Clearly a painful investing decision!
People still discuss Paytm on media platforms but now with more vigour and caution, than before where people were going on and on about it
Paytm’s listing failure: what it means for future IPOs
— timesofindia, 23 Nov 2021Paytm’s IPO debacle: Don’t blame Rio please
— Mint, 14 Jan 2022From IPO debacle to RBI Rap, What went wrong with Paytm
— The Quint, 15 Mar 2022Paytm is world’s worst performing large IPO in a decade
— thenationalnews.com 24 Nov 2022
News follows Price, Price does not follow the News!
The story doesn’t end here. There are more factors for you as an investor than meets the eye.
NO CONTROL OVER ALLOCATION
When you subscribe for an IPO, you cannot allocate capital in proportion to your overall portfolio because you are obviously not aware of how much will be allotted to you. Rather, in order to maximize the chances, investors are strongly tempted to apply for multiple lots in a bid to land at least 1 or 2 lots. Thus the potential risk in case of higher allocation is much high.
Paytm’s offer price was Rs. 2150 per share for a single lot of 6 shares each. A retail investor could have applied anywhere between a minimum of 1 lot for Rs. 12900 up to a maximum of 15 lots for Rs. 193,500.
Now Paytm only got subscribed 1.66 times by Retail investors. So if someone had applied for 7 lots would have definitely ended up having 4 in their kitty and not just 1 or 2. This means now their overall portfolio is overexposed to a poor stock; something that is dangerous to your financial planning when seen with risk management and Asset allocation lenses
Most investors fail to recognize this.
We suggest staying away from all IPOs
As a smart investor, you can always choose to be free from any biases or assumptions. There are many companies that trade every day on a stock exchange. They all offer historical evidence of performance for you to assess and then invest which is otherwise not possible for an IPO stock. This will also help you be in complete control when it comes to managing your portfolio, buy 1 or 10000 shares, whatever suits your risk management style
Remember! New companies entering the market through IPO do not have any evidence of proven performance. They only present figures in a bid to build favourable assumptions in the market.
And usually, it happens that the year these companies are IPO’ing, the numbers they report are inflated to attract a good price.
The question now is —
Do you really wish to operate under these odds?
Let me know what you think, in the comments
