Exercise Caution Before Taking A Plunge Into IPO Rush, Say Experts

India’s IPO pipeline is getting crowded and companies and promoters are lined up in the queue to take advantage of the buzzing IPO street. Analysts and market experts caution that a slew of companies are entering or have entered the market with aggressively priced IPOs. Investors need to exercise caution while navigating through the street, experts advised.

According to market observers, 2021 is a peculiar year from the primary market point of view. Despite Covid-19 disruptions hitting businesses globally, Primary markets in India witnessed strong activity in the ongoing financial year 2021. Typically, IPO listings depend on the secondary markets, and as a matter of fact, there were no new IPO launches or stock market listings in the first half but the second half of the financial year rewarded investors as equity made a resounding recovery.

This trend is expected to continue in the next financial year as well, as the secondary market sentiments have revived after the Covid-19 pandemic, around Rs 1 lakh crore of public issues (excluding LIC) are waiting to hit the markets in the near term as the uptrend in the secondary markets are likely to continue and companies are likely to take advantage of this development by piggybacking the rally. 

There is no certainty that the uptrend seen in the secondary market will be smooth and linear. There are roadblocks expected in its path and there are reasons to believe this. 

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, "Market trends are unclear. Also, the rise in core inflation, mainly pushed up by commodity price rise, is a concern. Recent Covid resurgence is another concern. Investors should always remember the fact that market valuations are high and therefore vulnerable to correction".

Currently, three companies are planning to tap the market or have entered the market with their IPO. All three companies have a smaller issue size (Rs 550-850 Crore) and amongst them, Anupam Rasayan and Craftsman Automation are raising funds to repay their big-sized debt. 

Anupam Rasayan is one of the leading companies engaged in the cotton synthesis and manufacturing of specialty chemicals in India with 65 per cent of revenues derived from exports and 35 per cent from domestic sales. 

Nirali Shah, Head of Equity Research, Samco Securities said, “Besides lofty valuations (PE of 68 times vs. industry average PE of 42 times), Anupam Rasayan opted for preferential allotment to its promoters in October and November 2020 at a price significantly less than the IPO price, which speaks volumes about its governance. Hence, investors should refrain from subscribing to this IPO”. 

Craftsman Automation, is a diversified engineering company, with vertically integrated manufacturing capabilities engaged in three business segments namely Automotive - Powertrain and Others, Automotive -Aluminium Products, and Industrial and Engineering. 

Though it has strong and well-established relationships with several marquee domestic and global OEMs, its balance sheet is burdened with debt and it trades at an expensive valuation of 73x P/E vs. an industry PE of 61 times. 

Considering the capital-intensive nature of business along with stiff competition among auto ancillary players, it would be advisable to look for other resilient listed players operating in the auto ancillary space and not subscribe to this IPO for the long term, Shah said. 

Laxmi Organics Industries is into manufacturing Acetyl Intermediates and Specialty Intermediates. Although the company operates in a high-growth segment with a significant market share, it has not been able to capitalise on this growth and has, in fact, seen a declining bottom-line over the last three years. 

Not only this, the IPO is expensively valued at a PE of 45.5x vs. the industry average of PE 35.5x. Shah opined that “It is advisable for investors to seek other listed peers for better returns over the long-term and avoid this IPO too”.

Fundamentally, all three companies have a number of red flags and are not advisable from a long-term investment standpoint. However, given the current buoyancy and liquidity gush in the capital markets, “risk-taking investors can see the sentiment on these IPOs on the last day of issue period and subscribe for listing gains only after considering their individual risk appetite as they are highly risky bets”, she said.

According to Prime Database,18 of the 23 IPOs saw first-day gains this year. That represents 78 per cent of the total stock listings in 2021as compared to only 69.23 per cent of the total 13 IPOs in 2020 and 53.3 per cent of the 15 IPOs in 2019.