HDB Financial Services IPO : The pre-IPO market, once considered a privileged route to assured returns, has demonstrated its volatile nature through HDB Financial Services' recent pricing revelation.
The company's IPO price band of Rs 740 represents a significant 40% reduction from its recent unlisted market value of Rs 1,225. Earlier investors who acquired shares at Rs 1,550 in the previous year now face a substantial 52% devaluation before the official market listing, according to an ET report.
With numerous IPOs in the pipeline, it's crucial to understand that not every unlisted stock represents exceptional value.
A similar scenario unfolded with Swiggy's pre-IPO trading, where shares previously valued at Rs 500 in the unlisted market prior to the November IPO have declined to approximately Rs 400.
Risks of unlisted shares
"I don't understand this fascination for pre-IPO stocks. You can't buy companies at any price just because they are getting listed," says Anand K Rathi, Co-founder of MIRA Money. "Many smart investors who have better access to information are ready to unlock value by offloading shares even before the IPO hits the street,” he told ET.
Rathi offers a stark assessment based on his experience: "The unlisted space is full of liquidity traps and opaque pricing. There's a post-listing lock-in of six months, and the prices at which retail investors enter are often obnoxious."
HDB shares were trading at approximately Rs 600 two years prior, as he noted. "But retail investors don't want to wait. They rush in right before the IPO, lured by the illusion of easy listing gains. Greed does the talking,” he was quoted as saying.
Prior to the IPO, the freezing of employee holdings restricted supply, causing prices to surge in the unlisted market. However, the announcement of the IPO price subsequently deflated these speculative valuations.
"In unlisted stocks , people like the charm and pomp factor. It's sexy to talk about owning a stock which isn't available on the exchange," Rathi stated.
Nevertheless, some investors achieved positive outcomes. "Several investors had entered HDB in the Rs 200–400 range five or six years ago. They're still sitting on healthy gains," according to Krishna Patwari, Founder & Managing Director of Wealth Wisdom India Pvt. Ltd. (WWIPL.com). "Retail investors often buy pre-IPO because the chances of IPO allotment are low and you only get a few shares. Pre-IPO gives you quantity, but comes with risks,” Patwari was quoted as saying.
The primary concern lies in valuation assessment. "If you're buying for the long term, unlisted stocks aren't a problem. But you must know what you're paying for. Valuations matter. And hype around an IPO can blind people," Patwari warned.
According to Patwari, a strategic approach involves investing 4-5 years prior to the IPO, when organisations indicate their listing plans through annual reports, AGMs or staff communications. "Once the IPO hype kicks in, it can be a 50:50 game."
He highlights positive outcomes in companies such as Tata Technologies, BSE, ICICI Prudential, Nazara and Barbeque Nation where post-listing returns have been substantial.
Expressing concern about the unlisted stocks enthusiasm, Edelweiss Mutual Fund MD and CEO Radhika Gupta described it as misrepresented excitement. "A perfectly good asset class which was meant for early stage investing for high risk takers is now marketed as the next sliced bread," she stated in her tweet addressing the matter.
"Public, private, or in between, there is a reality of valuations and financial gravity," she further noted.
The company's IPO price band of Rs 740 represents a significant 40% reduction from its recent unlisted market value of Rs 1,225. Earlier investors who acquired shares at Rs 1,550 in the previous year now face a substantial 52% devaluation before the official market listing, according to an ET report.
With numerous IPOs in the pipeline, it's crucial to understand that not every unlisted stock represents exceptional value.
A similar scenario unfolded with Swiggy's pre-IPO trading, where shares previously valued at Rs 500 in the unlisted market prior to the November IPO have declined to approximately Rs 400.
Risks of unlisted shares
"I don't understand this fascination for pre-IPO stocks. You can't buy companies at any price just because they are getting listed," says Anand K Rathi, Co-founder of MIRA Money. "Many smart investors who have better access to information are ready to unlock value by offloading shares even before the IPO hits the street,” he told ET.
Rathi offers a stark assessment based on his experience: "The unlisted space is full of liquidity traps and opaque pricing. There's a post-listing lock-in of six months, and the prices at which retail investors enter are often obnoxious."
HDB shares were trading at approximately Rs 600 two years prior, as he noted. "But retail investors don't want to wait. They rush in right before the IPO, lured by the illusion of easy listing gains. Greed does the talking,” he was quoted as saying.
Prior to the IPO, the freezing of employee holdings restricted supply, causing prices to surge in the unlisted market. However, the announcement of the IPO price subsequently deflated these speculative valuations.
"In unlisted stocks , people like the charm and pomp factor. It's sexy to talk about owning a stock which isn't available on the exchange," Rathi stated.
Nevertheless, some investors achieved positive outcomes. "Several investors had entered HDB in the Rs 200–400 range five or six years ago. They're still sitting on healthy gains," according to Krishna Patwari, Founder & Managing Director of Wealth Wisdom India Pvt. Ltd. (WWIPL.com). "Retail investors often buy pre-IPO because the chances of IPO allotment are low and you only get a few shares. Pre-IPO gives you quantity, but comes with risks,” Patwari was quoted as saying.
The primary concern lies in valuation assessment. "If you're buying for the long term, unlisted stocks aren't a problem. But you must know what you're paying for. Valuations matter. And hype around an IPO can blind people," Patwari warned.
According to Patwari, a strategic approach involves investing 4-5 years prior to the IPO, when organisations indicate their listing plans through annual reports, AGMs or staff communications. "Once the IPO hype kicks in, it can be a 50:50 game."
He highlights positive outcomes in companies such as Tata Technologies, BSE, ICICI Prudential, Nazara and Barbeque Nation where post-listing returns have been substantial.
Expressing concern about the unlisted stocks enthusiasm, Edelweiss Mutual Fund MD and CEO Radhika Gupta described it as misrepresented excitement. "A perfectly good asset class which was meant for early stage investing for high risk takers is now marketed as the next sliced bread," she stated in her tweet addressing the matter.
"Public, private, or in between, there is a reality of valuations and financial gravity," she further noted.
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