IPO’s,do they really add value to your Portfolio?

Twitter is a great way to share view points but given that one has limited number of characters within which to express one’s opinion, the opinion can be misconstructed to mean something other than what it was supposed to mean in the first place.

I made a comment on how major brokerages were recommending the DMart issue not because it was supposedly a great business to own but because it’s cheaper than other listed peers which is really a pathetic argument IMO.

Walmart sells at a PE of 14.61, Costco Wholesale Corp @ 31, Home Depot Inc @ 25.3, Target Corp @ 9.21 times.

— Prashanth (@Prashanth_Krish) March 8, 2017

Here is a comparative valuation chart of all listed companies in the Retail space (Data Courtesy: http://www.moneyworks4me.com/)

But even leaving aside the Valuation concern, the question here is does it make sense to apply for IPO’s in general.

I am not a fan of IPO’s in general and the worst IPO’s are those that come at the peak of a market rally. With markets already hot, even normal companies get extra ordinary valuations, great companies get whatever they ask for.

The objective of every merchant banker / investment manager is to try and maximise returns for the selling shareholder while also ensuing something is left on the table for the allotee as well.

In recent times, most IPO’s have opened higher than the price at which they were sold which seems like a great opportunity for a investor. But it’s not as if every investor gets allotted the number of shares he applies for.

In case of DMart, investors will be lucky if they can get a single lot (50 shares). This means that unless you are a very small investor, even a 50% pop will barely register on your total portfolio (If your Equity Portfolio is worth 25lakhs, a 50% pop will mean a profit of 7,500 Rupees {that is assuming you are lucky enough to get a allocation} which is 0.3% of your portfolio).

One historical example that has been used suggest that even paying a high price to earnings is worthwhile is by using the example of Walmart. Like Sam Watson used a different strategy that set aside Walmart from rest of the competition, so has DMart. But will it be able to replicate its own success of its Initial years is something only time will tell.

The Key difference is that unlike the time when Walmart started up, the playbook to success in retail is way different. As a investor, it definitely makes sense to apply to the IPO. If you are a small investor, opening pop can provide for juicy returns where as if you are a large investor, at worst this could be a tracking position.

Ultimately though, your returns are less driven by IPO’s such as these and more by how much of your net worth you allocate to a particular asset class, the kind of returns you are able to generate in that asset class and the asset allocation model you follow.