The IPO Duds of 2021. What Can You Learn from these Debacles...

• 'You don't want to get into a stupid game just because it's available'.

This is what Warren Buffett said back in 2016 at Berkshire Hathaway annual meeting.

In investing, just because an investment works well for others doesn't imply it's wise.

This piece of advice given by Mr. Buffett is correct.

Just think of the success of IPOs. The year 2021 has turned out to be extremely good for India's primary market. 59 companies raised funds via initial share sale.

However, India's largest initial public offering (IPO) till date, Paytm, showed the world that high profile IPOs can fail too.

Back in the year 2008 the story of India's IPO failures was best shown by the Reliance Power's IPO.

Even the magic of the Reliance brand failed to keep the company afloat.

During that time, the consensus among investors was that its shares would list for at least double the issue price.

But the market had other plans for the company on its listing day. The stock debuted at a tiny premium, but quickly fell, and it never returned to its issue price.

The buzz around Reliance Power's public issue is very similar to what is currently being experienced by new-age companies.

According to a report, a total of 108 companies from the new economy sector, with a valuation of US$435 bn are IPO ready.

CMS Info Systems, MobiKwik, Oyo, Skanray Technologies, and Byju's are few of the firms that have either floated their IPOs or are planning to do so in the near future.

Other let-downs

Is Paytm the largest wealth killer among Indian IPOs in 2021?

Not really.

There have been a slew of failures. Paytm is only one of them - albeit the largest. There are, in fact, a few well-known names on this list.

CarTrade Tech, Kalyan Jewellers, Krsnaa Diagnostics, and Aditya Birla Sun Life are currently trading more than 20-25% below their offer price.

List of Worst Performing IPOs of 2021

Company name	Issue price	Current Price	Returns (%)
Rategain Travel Technologies	425	367	-13.7%
One 97 Communications	2,150	1,312.5	-39.0%
SJS Enterprises	542	370	-31.7%
Fino Payments Bank	577	380	-34.0%
Aditya Birla Sun Life AMC	712	529.3	-25.7%
CarTrade Tech	1,618	849.8	-47.5%
Krsnaa Diagnostics	954	658.5	-31.0%
Windlas Biotech	460	263.8	-42.7%
Kalyan Jewellers India	87	67.5	-22.4%
Suryoday Small Finance Bank	305	147.7	-51.6%

Source: Equitymaster

Many investors lost their money on the IPOs of about more than 10 firms this year.

Can high valuations be the reason behind the story of unsuccessful IPOs

When it comes to investing in IPOs, it appears that size does matter.

Think about it...

The number of internet-based companies seeking to go public is increasing every day. Despite making smaller profits, or no profits at all, these firms seek significantly greater valuations than their traditional, listed competitors.

For example, last month, by filing paperwork with the market regulator for its public issue, logistics start-up Delhivery has joined the IPO race.

We all know that the logistics industry is not new.

However, the US$5.5 bn valuation that the 10-year-old firm is apparently pursuing is over 2.5 times the market price of Blue Dart, a 38-year-old established company.

On the other hand, Oyo, hotel-room aggregator, is apparently seeking a valuation three times that of Tatas-owned Indian Hotels.

Moreover, the euphoria of owning a piece of these well-known brands has caused a new generation of young, tech-savvy investors to enter the market.

Since the pandemic, retail investors, both young and elderly, have flocked to the stock market. This rush is being fuelled by the advent of app-based trading platforms that provide seamless onboarding and trading experiences.

Excess liquidity in the market is also one of the core reason behind the high valuation of these IPOs.

What we can learn from these debacles...

Despite the pandemic, the IPO industry has been thriving.

Even in the hottest markets, though, things may quickly turn sour. Some of the biggest brands managed to flop spectacularly on their debut.

Here's a look at what we can learn from the IPO failures going ahead.

1. Don't ignore valuations: Investing in a firm entails paying the 'correct' price for its stock.

The basic method to investing does not need to alter whether the firm is listed or an IPO.

Is the company doing well? Will it be able to constantly increase sales and earnings while increasing its market share? What strategic advantage does it have? Is the management trustworthy or do they have a shady past? All of this will tell you if you have the 'correct' stock.

Investment bankers frequently assign a high valuation for the company, leaving no room for regular investors. So, are you ready to pay a premium valuation for an IPO when you can buy its listed counterpart at a lower price?

Essentially, you should examine an IPO in the same way that you would any other publicly traded business.

2. Don't look for quick returns: The most appealing aspect of IPO investment is the possibility of making rapid profits.

Investing in IPOs to profit from listing gains is a risky endeavour.

Rather, consider investing in it with a long-term view. Instead of thinking about short-term gains on listing, consider if it's worthwhile to invest in it even if the stock market were to close for the next ten years.

3. Don't believe in everything you read or see: Newspapers, web media, social media and so on, subtly promote the concept of IPO investing to you.

They are used by large corporations to create a favourable environment for IPO investing since the firm is making its public debut.

Do your own research before blindly following anyone from your social media apps or some other unreliable source.

4. Plan well before applying: Seasoned investors usually have a plan that is based on facts and data.

However, first-time investors sometimes succumb to the guessing game and invest in IPOs that appear to be receiving an overwhelming response in the market.

If you don't have a good strategy in place you won't have an end objective. Your investing pattern might be rather irregular as a result.

This, in turn, may cause you to become a reckless investor, resulting in larger losses if you are not careful.

The best way to avoid this error is to first create a clear strategy before applying for any IPO.

Determine your objectives first and only then develop a strategy. Be prepared to do a fact-based investigation into the financials of the company before investing.

5. Big names doesn't mean big gains: This is another common misconception.

We feel big names are so well-known that investing money in these firms is a secure bet. This isn't always the case.

We have already given you the example of two eminent companies who failed their investors - Reliance Power and Paytm.

Whenever such brands make their way into the Indian markets, make sure you do not fall for it because of their name.

Back in September 2021, lead smallcap Analyst at Equitymaster, Richa Agarwal in one of her videos talked about how to pick the next winning IPO.

In the video below, Richa shares some qualities that could help you avoid scammy IPOs, and pick the ones with the highest potential to create long term wealth.

Now that you've checked out the IPO duds of 2021, do take a look at the ones which performed exceptionally well, i.e. the best performing IPOs of 2021. We've also discussed what makes these companies special...

Last words

These are among the most common mistakes investors make when applying for any IPO.

It's critical to examine each IPO separately and weigh all the advantages and disadvantages.

Don't get distracted by the pomp and circumstance, or by what others are doing.

Always remember to look beyond the listing benefits when investing in an IPO.

Think long-term and focus on those firms with good promoters with a track record of governance.

Finally, choose IPOs that are accessible at 'decent' valuations.

Happy Investing!