IPOs Are Not Lottery Tickets; Look Beyond Listing Gains And GMPs

Don't treat IPOs as Lottery Tickets for Instant Profits

Over the years, IPOs have come to be viewed by many as a shortcut to instant profits. This mindset can be misleading and damaging. Investors should not treat IPOs like lottery tickets or apply purely for listing gains. The true value of an IPO lies in its ability to offer participation in a company's long-term growth story and not in the few hours after listing day. The organisation's intrinsic value, which is its actual, fundamental worth, is to be considered rather than the initial market price set during the offering.

Stay cautious of Grey Market Premiums

A common pitfall is the overreliance on Grey Market Premiums (GMPs). GMPs often reflect short-term speculation rather than true value. Several IPOs in recent past have proved that low GMPs can still lead to strong post-listing performance.

For example, Swiggy's IPO had a muted grey market premium before listing, yet the stock rewarded investors handsomely once the company delivered on its business fundamentals. On the flip side, many investors lost money by chasing IPOs solely based on high GMPs, only to see those premiums vanish before listing or the stock correct sharply after debut. Remember, a low GMP doesn't imply a weak IPO, and a high GMP doesn't guarantee profits. Avoid being misled by short-term noise.

Fair Valuations: A Boon for Retail Investors

Today, many IPOs are being priced more attractively than their unlisted valuations. This gives retail investors a rare opportunity to own shares at a far lower price than what large HNIs paid in the unlisted market. It's a healthy trend that reflects better diligence and fairer pricing practices by issuers and merchant bankers. It is also an indicator of the growing maturity of India's capital markets, where valuation realism is replacing exuberance.

A Thoughtful Approach to IPO Investing

Investors should approach IPOs like any long-term equity investment. Study the company's management, business model, promoter background, and financial performance before applying. For fundamentally strong companies, one strategy could be to invest partially at the IPO stage and add more post-listing if prices soften. This way, investors can average into quality businesses at good valuations without taking excessive risk.

Follow the Smart Money

Another practical tip is to track institutional participation. Large domestic and global investors have access to sophisticated research and valuation tools. The anchor subscription levels of these institutions, which are public before IPO closure, can provide valuable insights into the confidence institutional investors have in the issue. One can get comfort in such IPOs where large institutions have subscribed in the Anchor investment category.

The Big Picture

With several high-quality IPOs in the pipeline, investors will have ample opportunities to participate in India's next phase of growth. The upcoming offerings span a diverse mix of sectors — from new-age technology, retail, e-commerce, and quick commerce to infrastructure, health-tech, and fintech. Many of these companies are in their expansion or profitability acceleration stages, presenting a sweet spot for long-term investors looking to gain exposure to India's structural growth story.

The key, however, is to stay informed and rational. IPOs should be viewed not as speculative events, but as long-term partnerships in India's growth narrative.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)