Avoid initial offers of cyclical companies at high valuations

Be wary especially if the promoter is cashing out through the IPO

- HIMALI PATEL

Together companies raised ₹1.7 trillion through initial public offerings (IPOs) in 2024. Fund mobilisation through this route is expected to rise and breach the ₹2 trillion mark in 2025, according to estimates by investment banking firm Pantomath Group. Investors planning to go for IPOs in 2025 should be cognisant of both the risks and the opportunities.

Key risks

Amid the bullish market conditions of 2024, many IPOs received an overwhelming response. This had consequences for retail investors. "It often led to IPOs coming at inflated valuations," says Yash Sedani, assistant vice president, investment strategy, 1 Finance.

In bullish times, getting the desired allotment becomes a big issue.

In an IPO, investors have limited access to a company's historical performance, as regulations mandate disclosure of only three years of financial data. Companies often go public during periods of strong performance. In contrast, long-listed companies allow investors the opportunity to evaluate their performance across multiple business cycles.

The promoter and the investment bankers determine the pricing in an IPO. They naturally try to get the best possible price for themselves, taking advantage of bullish sentiments. "The pricing of a stock in the secondary market is discovered pricing," says Sunil Subramaniam, market expert and chief executive officer, Sense and Simplicity, a financial literacy venture. This pricing reflects the consensus opinion of investors (and market sentiment).