The Indian stock market continues to witness a steady stream of Current IPO offerings, drawing attention from retail and institutional investors alike. While some Listed IPO stocks have delivered impressive returns post-listing, others have failed to live up to expectations—often because of one key factor: valuation. With many companies commanding steep valuations even before proving themselves on the bourses, investors are left asking the critical question—should you apply to a Current IPO with a high valuation?
Let’s break this down.
What Does a High Valuation Signify?
In simple terms, a high valuation means the company is being priced expensively relative to its earnings, book value, or cash flows. Metrics like the Price-to-Earnings (P/E) or Price-to-Sales (P/S) ratio are often higher than the industry average. While a high valuation isn’t always a red flag, it does imply that the company must grow rapidly in the future to justify its price.
Pros of Investing in a High-Valuation IPO
- Growth Potential: Companies with high valuations often operate in high-growth sectors like tech, fintech, or EVs. Investors may be willing to pay a premium for future growth.
- Strong Market Position: A high valuation could reflect the company’s brand value, leadership position, or customer base—indicating long-term promise.
- Anchor Investor Confidence: If marquee institutional investors or mutual funds have subscribed during the anchor book phase, it may signal confidence in the company’s prospects, despite the pricing.
Cons of Chasing Expensive IPOs
- Limited Listing Gains: When valuations are stretched, the room for upside post-listing can be limited. In fact, the stock may correct if broader markets turn volatile or if earnings disappoint.
- Lower Margin of Safety: Investing in an overpriced IPO reduces your margin of safety. If the company’s actual performance doesn’t match its projected growth, the downside risk increases.
- Speculative Sentiment: At times, high valuations are driven by hype or a short-term market frenzy. In such cases, fundamentals take a backseat, increasing volatility after listing.
How to Decide?
If you’re evaluating a high-valuation IPO, consider the following:
- Compare with Peers: Check how the IPO is priced relative to competitors. Is the premium justified by better margins, higher growth, or stronger brand equity?
- Look at Use of Proceeds: Is the company using IPO funds for expansion or just repaying debt? The former signals future growth, while the latter may not add value to shareholders.
- Check Financials & Ratios: Analyze revenue growth, profitability, debt levels, and ROE/ROCE metrics. Strong fundamentals can justify higher pricing.
Final Thoughts
Applying to a Current IPO with a high valuation is not necessarily a bad idea—but it demands careful analysis. Don’t get swayed by hype or fear of missing out (FOMO). Unlike a Listed IPO, where stock performance post-listing offers clues, you’re essentially betting on future potential in a new IPO. If the business model is sound, sector is promising, and valuations are justifiable, the investment may pay off in the long run. Otherwise, it’s okay to pass and wait for better opportunities.
