Can investing in IPOs make you rich?

“Should I invest in this upcoming IPO?” is a question I get very frequently asked these days by friends and family. This ain’t surprising given the string of IPOs getting launched. We’ve already seen over 15 companies raise money through IPOs in 2021 and most of them have seen robust demand from investors. The subscription numbers are exorbitant owing to easy liquidity conditions, the continuing bull rally and huge interest among retail investors.

In fact, last week was the biggest week for IPOs in India in over a year, six companies including the likes of Rakesh Jhunjhunwala-backed Nazara Technologies, Lakshmi Organics, Kalyan Jewellers closed their issues by March 19, together mobilising a little over Rs 4,500 crore.

But why are retail investors flocking the street amid the IPO frenzy? Well, eye-popping listing gains for some recent Dalal Street debutants have generated a lot of interest and there is a common belief that at issue price one can invest at the very lowest and over time it can give investors multi-bagging returns.

While it most certainly can, but not always.

This also reminds me of one famous Warren Buffett quote: “It’s almost a mathematical impossibility to imagine that out of the thousands of things on sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

There are a host of stories about companies not doing well after listing as one would expect, ultimately leading to an erosion of wealth. One such story is of Reliance Power, whose IPO came out in 2008 but soon, the Anil Ambani-led company proved that relying solely on the brand name, and the promise of the energy sector, wasn’t enough to sustain good performance. Today, one share of Reliance Power is worth 98% less than its initial price. Another story is of Coal India. Today, this company is still valued at about the same level as it was nine years ago.

So the moot question is can investing in IPOs make you rich?

Well, as reported recently in a leading business daily, brokerage firm KR Choksey’s data compilation has suggested that barely 8% or one in every 13 IPOs launched since 2001 have grown more than five times till February 2021 and among those which managed to achieve the feat, 75% were listed before 2010, meaning it took them over 10 years to do so.

Now I don’t want to discourage investors looking to grab the much-coveted pie of the upcoming IPOs but certainly wish to say a word of caution, especially to first-time retail investors so they are not driven by seeing these huge listing gains or oversubscription figures.

What investors should check before investing in IPOs

Before you choose to invest in a certain company, first understand the company’s core values, policies and objectives. Investors should also know about the company’s promoters and their credibility. One must also note the market growth opportunity in which the company is operating, positioning of the company and competitive landscape. As for valuations, one should follow cues from institutional investors or look at some listed peers to compare.

In the end, I’d only say that one must do a thorough research when investing in the IPO of a company and only do so if the company has the potential to grow into a more prominent company and check whether rewards outweigh the risk of the investment.