The Peril of Profitless IPOs: A Reality Check for Indian Investors
The Indian stock market is preparing for a fresh wave of initial public offerings (IPOs) from companies branded as 'digital' pioneers. According to Dhirendra Kumar, CEO of Value Research, this trend masks a dangerous reality for the average investor. An in-depth examination of nine high-profile 'digital' IPOs from the last three years reveals a startling truth: six are still trading below their issue price, with the majority remaining deeply unprofitable.
The Illusion of Digital Buzzwords
The market is flooded with new-age companies described with evolving buzzwords like 'platform', 'AI', and 'technology-enabled'. Kumar cuts through this jargon with a simpler, more accurate definition: these are companies that have never made a profit and likely never will. The damage inflicted by these entities extends far beyond individual portfolio losses. It strikes at the fundamental principle of how a market economy is supposed to function—rewarding success and penalizing failure.
The core strength of a market economy is not just that good businesses thrive, but that bad ones are forced to shut down quickly. This process frees up capital, talent, and other resources, allowing them to be reallocated to efficient, profitable ventures. However, the current ecosystem surrounding the tech sector operates in reverse. Capital continues to flow into unsustainable businesses for years, even decades, creating significant distortions for employees, competitors, and customers.
Real-World Consequences and the Public Sector Parallel
We have witnessed this phenomenon globally. Traditional taxi services in India and abroad were disrupted by ride-hailing apps that, to this day, struggle to achieve profitability. The outcome has often been higher prices for consumers, decimation of traditional services, and unsatisfactory conditions for drivers. A more recent example is the rise of quick grocery delivery services, which have begun to disrupt neighbourhood kirana stores. The trajectory for this sector is already predictable based on past patterns.
Kumar draws a striking parallel between this new tech sector and India's old public sector. Money flows in continuously without any real pressure to generate profits or operate efficiently, a model that historically led to economic disaster. While the risk was previously contained within foreign venture capital circles, the game has now shifted. The primary victims today are Indian retail investors, who are being drawn into a high-stakes gamble.
The Sophisticated Machinery Targeting Retail Money
The methods used to attract retail investment are becoming increasingly sophisticated. Kumar highlights a recent example where a well-known retailer is preparing for an IPO with a valuation that is difficult to justify. A respected investor made a relatively small investment at the upper end of the expected IPO price band. This strategic move, representing a minuscule fraction of the total valuation, is designed to create a halo effect, potentially attracting thousands of crores from retail investors who see the big name and assume safety. This is an illusion.
The great irony of the technology world is that for every Google or Amazon, there is a far larger number of companies that have never been profitable. This reality is now prevalent in India. The solution for retail investors is straightforward: stay away. These IPOs are fundamentally designed to transfer wealth from your pocket to promoters and early investors.
The information asymmetry is vast. Promoters and existing investors possess complete knowledge of the business—every strength, weakness, and risk. They choose to sell to the public at a moment that best suits them, which is typically when valuations are inflated and market sentiment is euphoric. As Warren Buffett once noted, an IPO is a negotiated transaction, and the timing is rarely favourable for the buyer.
Retail investors, on the other hand, have only a carefully curated prospectus for guidance. There are always better alternatives available in the secondary markets—companies with proven business models, actual profits, and reasonable valuations. Let institutional investors and venture capitalists gamble on unprofitable ventures. For the rest, the prudent path is to invest in companies that actually make money. For a healthy economy, bad businesses must fail, and fail fast. The modern financial sector, however, seems focused on sabotaging this essential process.
