Vivek Kaul: Today’s IPO frenzy can’t be attributed to India’s growth story

Saraswati Saree Depot, targeting ₹160 crore, garnered bids surpassing ₹17,000 crore. Boss Solutions, which wanted to raise just ₹8 crore, ended up with bids of close to ₹1,100 crore. These examples reflect the current IPO frenzy in India.

Data from Chittorgarh, a portal specializing in IPO data, suggests that 2024 has seen 59 IPOs raising a total of ₹63,862 crore, with the average IPO being subscribed many times over.

Further, as the Reserve Bank of India’s latest State of the Economy report says: “September is set to be the busiest month for IPOs… in 14 years, with over 28 companies entering the market so far." It also points out that “India accounted for the highest number of IPOs globally (27 per cent by volume) in [the first half of] 2024."

So, what’s really happening here? Why is a company looking to raise ₹6,560 crore ending up with bids of over ₹3.2 trillion. Or why is a company looking to raise ₹8 crore ending up with bids of close to ₹1,100 crore?

Also read: The IPO frenzy isn’t a sign of a robust stock market

Do these companies have unique business models expected to throw up a lot of money in the years to come? Take the case of Bajaj Housing Finance, which is primarily in the home loans business as a non-banking finance company. 

Such businesses borrow money at a certain rate, lend at a higher rate and earn the margin. To earn higher margins, they’ll either have to borrow at a much lower rate or charge much more for loans, which does not seem possible in what is a very competitive market.

Further, if such a company tries to drum up more business by growing its loan book quickly, then it may have to start compromising on the quality of its lending, which will eventually impact its profits. Similarly, PN Gadgil Jewellers is a company in a sector with a well-established business model.

The same applies to many IPOs hitting the market today: these are not venture capitalist-backed businesses designed to leverage network effects—where customers once acquired find it hard to leave—and generate substantial monopolistic profits in the future, a potential that drives up valuations. 

Instead, most operate in competitive sectors where the chances of extremely high profits are next to non-existent. This can be seen in the lower valuations of companies that are already listed on stock exchanges and compete with these newer businesses.

And that brings us back to this question: Why is there such huge demand for these IPOs?

If you were to talk to anyone in the business of selling shares—from merchant bankers to stock brokers—or those in the business of managing other people’s money (OPM)—you will hear that the India growth story is still going strong. For over the last two decades, this has been a standard reason offered for buying stocks.

Also read: Mint Quick Edit | Resourceful IPO: Irrational exuberance?

From the end of 2002 to the end of 2007, the NSE 500 Total Returns Index (TRI)—a comprehensive measure of the broader Indian stock market that also accounts for dividends—delivered an impressive annual return of over 50%. 

During this period, those involved in selling shares and managing OPM enthusiastically promoted the ‘India growth story.’ The problem is, they continued this narrative for the following decade, from the end of 2007 to the end of 2017, even though the NSE 500 TRI only delivered modest returns of around 7% per year.

So, the India growth story has been offered as a reason to buy stocks irrespective of valuation levels. And this is important because it leads many retail investors to buy stocks around times when they are extremely expensive, like they were in 2007 and like they are now in 2024, thus limiting their returns in the medium to long-term.

So why is there such huge demand for IPOs? The large sums of money chasing IPOs tells us that these investors do not see other viable investment opportunities available to them. 

On the other hand, it can also be argued that the huge returns delivered by stocks since March 2020 have made other investment avenues look unattractive to investors besotted with equities. So, it’s a bit like the chicken and egg story.

Indeed, if one can make huge returns by sitting at home and investing in stocks over a smartphone, why would one bother investing in a small business or other financial investment avenues for that matter? So, we have reached a stage in this financial cycle where these expensive IPOs are actually hurting the Indian economy.

How long this trend will continue is anyone’s guess. However, it’s worth recalling what happened after the Reliance Power IPO hit the market at an astonishingly high valuation in early 2008. Data from Chittorgarh shows that there were 108 IPOs in 2007. 

Also read: Why India’s IPO mania is similar to the dotcom bubble

We are in 2024 now and the highest number reached since has been 66 in 2010 and 63 in 2021. In fact, the number of IPOs from 2012 to 2020 stood at just 168. Every excess is followed by a quieter period, though its span of time can’t be precisely predicted.