One of the most common questions often asked by investors is what should one keep in mind while investing in an IPO? Well, follow ace investor Warren Buffett's advice, says Mohit Gulati, CIO & Managing Partner of ITI Growth Opportunities Fund.
“The key mantra that every retail investor should keep in mind is what Warren Buffett has said: 'An IPO is like a negotiated transaction – the seller chooses when to come public – and it's unlikely to be a time that's favourable to you.'.” said Gulati in an interview with Mintgenie.
Gulati discusses current IPO trends and shares his thoughts on new listings this year and public offers likely to do well next year.
Edited Excerpts:
1. What are the key factors which retail investors should keep in mind before investing in IPOs?
The key mantra that every retail investor should keep in mind is what Warren Buffett has said: “An IPO is like a negotiated transaction – the seller chooses when to come public – and it's unlikely to be a time that's favourable to you.”
Contrary to the popular belief that IPOs make money, if you look at on a sustained 20-30-year perspective, IPO return in the 1990s were great because companies used to get listed at a very low premium to their market caps, but of late, there is very little left on the table for the retail investors to make, whether it is Nykaa, Paytm, Zomato, CarTrade or Policybazaar.
Also, people don't do enough research before applying to an IPO, and everyone's looking at grey market premiums and trying to buy a company IPO and exit on the day of listing or a day after that… It's the wrong way, as one is not an investor but an arbitrage player. And it's the wrong way to start one's investing journey.
2. SEBI is set to propose strict disclosures. The regulator has even asked companies to justify the high valuation at the time of IPO. What do you think will be the implications of this move on companies set to go for IPO in the immediate future, and also on the investments?
There's been a massive dichotomy in the way private equity or VC investors look at stocks or companies & valuations versus the way the listed market does. To give one perspective, when Amazon listed itself in 1994-95, it churned out 40 quarters of negative losses before they turned positive. So, in 2005-2007, they turned positive, and that's when the stock also gave some meaningful returns. The stock didn't even give 8 percent per annum CAGR before that. What this teaches us is that valuations at the time of entry, especially for an IPO, need to be monitored. I believe the phase that we are in is a good learning time for all kinds of investors.
One needs to be patient, and see the long-term unlocking of some of these technology companies, which may or may not even happen.
For example, in the case of Zomato, the hopes are pretty high, but in future, if there is a massive disruptor that comes in like Reliance, and enters the space, then the scenario would be different.
With regards to SEBI, they have taken a good step, as retail investors are like their darling children, and they don't want their retail investors to have a sour taste of the markets, and more so with regards to stocks that are listed at higher prices, and then go belly up returning -68 to -70 percent. SEBI is proactively doing what its job is but also as founders people need to realise to leave enough room on the table or money to be made for retail investors then SEBI will allow the issue to go.
Hence, I don't think SEBI's action will have much adverse effect on the well-priced issues but greedy expensive ones will surely find it tough to get approvals.
3. Which industry's IPOs are likely to do well in the next calendar year?
It's hard to say but I think there are some interesting companies, which fit into the IPO story, I can think about something in the AstroTech space. Take the case of AstroTalk which digitally empowers astrologers and clocks close to 700-800 crore rupees of topline and bottom-line of close to 50 odd crore rupees. Cash flow backed technology stocks like these should find acceptability.
So, I think such stories that are profitable and have a path to profitability in the very near immediate future will find IPO footing, and for the others, it's going to be at least 2-3 years behind, and it's going to be hard to list themselves.
4. According to you, what were the hits & misses in IPO this year? Were there some disappointments, in your opinion, about the public issues?
I think all the technology companies have been a massive disappointment because this is just blatant greed on behalf of everyone. Merchant bankers, investors, and founders, which lead to an ill-timed, ill-priced issue. Barring the tech issues, I think all the other issues have filled in pretty well, for instance, there's Bikaji Food - it's an expensive company, but it has great growth prospects. It's a full-blown profitable cash flow-rich FMCG company. It has got listed at a bumper premium. Similarly, there is Pradeep Phosphates and so many other companies that are doing well. So, I think, there are a lot of hits, but not in the technology space, all the hits have happened in the non-tech space.
5. Overall, IPOs in 2022 helped investors make more money than in the past two years. Do you expect this phenomenon to continue amid bearish sentiment in the market?
I am not sure, and it is going to be difficult to gauge how 2023 will fair out. I think 2021 has a lot more free money available, as monetary policy across the world printed more capital. The world was a very hyper-liquid space, and that's why the IPOs sailed through very quickly. But as the bearish sentiment comes into the market, and as people are getting conservative, people who have lost money in some ill-priced issues do not want to come to the IPO market. It's going to be tough for the new-age companies to list themselves. But good companies that have decent cash flow backing them, and priced well, would have their IPOs out even in bear markets.
6. One piece of advice to new and young investors who are looking to enter the market for the long term.
I think when you think about entering the market for the long term, learn the classic philosophy of buying and holding the right companies, build your thesis around every investment that you make, whether it's listed or unlisted, and stick by that thesis.
You make your calls wrong once or twice, but as long as you have some core underline thesis around why you invested in a particular stock, and you are not doing it because somebody told you to or tip from the street that you got, then you are in good hands. Any new investor should learn to evaluate companies on their own, look at core parameters of earnings, and take concentrated bets on whether they should invest or not in a particular business.
