Rahul Bhasin Warns: IPOs Like Amazon and Zomato May Fuel FOMO, But Are They Still Worth the Bet?

Rahul Bhasin from Baring Private Equity Partners shared his thoughts on whether IPOs are still a smart investment. According to him, the returns from IPOs in recent years, particularly in 2021, 2022, and 2023, have generally not outperformed the market. In fact, IPOs have often underperformed, even when companies are delivering returns.

Comparing IPOs of 2024 to the Frenzy of 2021

When asked if the 2024 IPOs are different from those of 2021—when the market was full of excitement but many companies had no clear path to profitability—Bhasin pointed out two key points. First, IPOs often offer better returns after a long period of few or no IPOs. For example, in 2021, there had been a lull in the IPO market for almost a decade, so when companies started going public, investors saw higher-quality businesses.

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However, as the cycle of IPOs continues, the returns tend to decrease. Bhasin mentioned that IPOs are often launched when companies, insiders, and investment bankers see the most favourable conditions for themselves, which might not align with the best interests of buyers. He added that IPOs usually offer the highest level of disclosure and information about a company, which can help investors find a few hidden gems, but for the average investor, it can be a challenging game to win.

Finding Gems in IPOs

Bhasin gave examples of international companies like Amazon, Google, and Facebook, whose IPOs turned out to be excellent opportunities for investors. He acknowledged that there are always exceptional cases where new or evolving sectors, especially in the tech world, could offer fantastic IPOs. But overall, he believes that the general trend has been that IPOs have not outperformed the markets in recent years.

Profitability and Valuations

Bhasin was also asked about how companies that go public sustain their profitability and if their valuations are justified. He explained that he believes the shift from internal combustion engines to electric vehicles (EVs) will be a significant trend, but making bets on EV companies involves many uncertainties. Investors need to consider factors like government subsidies, competitive advantages, distribution networks, and economies of scale.

He also compared the situation to the automobile industry in the U.S. after World War I, where there were 18,000 car companies, but by 1954, only four remained. This shows that it can be wise to wait and see which companies survive and succeed in the long run, especially for retail investors who might jump into investments due to fear of missing out (FOMO).

Where Are We in the IPO Cycle?

Bhasin was asked about where the market currently stands in terms of the IPO cycle. He said that IPOs had been quiet for almost 10 years until 2021, when there was a surge, and that surge has continued. In just the last two months, around 20 IPOs have been launched, with many doing well.

He pointed out that some companies might be priced higher than justified, and while marquee investors have shown interest, it’s important to assess whether paying the current prices is worth it, especially for the smaller companies.

Market Overview

From a broader market perspective, Bhasin believes we are on an economic upswing, with real estate, manufacturing, and IT sectors showing positive signs. He mentioned that India is crossing the $3,000 per capita income mark, which suggests a shift towards a higher growth rate for the country.

However, he warned that the market is currently expensive, with a market cap to GDP ratio of nearly 160%. Historically, this has led to significant corrections. Although Bhasin doesn’t expect a serious sell-off, he said that some kind of correction is likely, whether it’s a time correction or a price correction.

Overall, he believes that aggregate market returns will be lower, as the current IPOs are being priced at high market levels, and investors should be cautious about the growth expectations built into these valuations.