HDB Financial's pre-IPO lottery backfires. Are unlisted stocks not worth the hype?

Economic Times

6 days ago

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If IPOs are lotteries, then pre-IPOs were supposed to be the VIP ticket to easy money. But for HDB Financial Services investors, that golden ticket has turned into a cautionary tale and a costly one at that.The Rs 740 price band for HDB's IPO is 40% lower than the Rs 1,225 levels it was fetching just days ago in the unlisted market. And for those who bought last year at Rs 1,550? They're staring at a gut-wrenching 52% erosion in value before the bell even rings on Dalal Street.Even last year, pre-IPO investors got signed in Swiggy whose shares were changing hands at over Rs 500 in the unlisted market just a month before the IPO launched in November. Today, the stock is trading around Rs 400."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.'Rathi, who has seen this game play out before, doesn't mince words: "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, he pointed out, were available for around Rs 600 two years ago. '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.'Ahead of the IPO, employee holdings were frozen, throttling supply and driving up prices in the unlisted market. But when the IPO price was announced, it knocked the wind out of 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 added.But not all were left licking their wounds.'Several investors had entered HDB in the Rs 200–400 range five or six years ago. They're still sitting on healthy gains,' said 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."And the biggest risk? Valuation. "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.Patwari advises a long lens: ideally invest 4–5 years before the IPO, when companies signal listing intentions via annual reports, AGMs or employee communications. 'Once the IPO hype kicks in, it can be a 50:50 game.'He points out success stories like Tata Technologies, BSE, ICICI Prudential, Nazara and Barbeque Nation where investors have made handsome returns post listing.Edelweiss Mutual Fund MD and CEO Radhika Gupta raised a red flag on the frenzy around unlisted stocks, calling it a case of mis-sold hype. "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 cautioned in a tweet on the issue.'Public, private, or in between, there is a reality of valuations and financial gravity,' she added.As the IPO floodgates are open, remember that every unlisted stock isn't a hidden gem.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)