I generally don’t like writing about stuff that everyone’s writing about. Opportunities exist when few people know about an idea, and it fizzles out when it becomes mainstream. So, in general — I like looking at stocks [or sectors] that no one is talking about right now but will talk about a few years into the future.
Anyways — so everyone’s talking about the Lenskart IPO. There’s a big hoo-la-hoo about the $7B market cap. Yes, it is outrageously priced. And yes, the company has not left a lot of money on the table for retail investors. The early backers + Peyush Bansal will make some serious gains. That’s the strategy.
But, Mr. Bansal is not forcing anyone to buy into the IPO. It is a free market. And yet, you will see retail investors apply to the IPO for a simple reason — listing gains. Its the urge to make a quick buck. Greed. A basic human emotion, which trumps all logic.
As of today, the company’s grey market premium is 23% — which means that there is a probability that Lenskart will list at a premium of 20%+. Which means, if you get the allotment, you’d make a quick profit of INR 3,500, in theory.
As a result, the issue is already subscribed by 1.13 times on the first day, despite the backlash on the valuations. Despite the fact that the company has razor thin margins.
At a P/E of >200 times, you’d think that Lenskart is in the business of bio-medicine, gene-editing or quantum computing — fields which could command HUGE pay-offs in the future.
But the business is much simpler. They sell you eye-wear products. Sure, they have additional features like virtual try-ons, AI based face detection etc. The brand has strong recall. The Lenskart Gold membership does provide value to customers.
But, to scale they need to open more stores. Compete with veterans like Titan. It’s not a SaaS business, where you write a piece of code which you can scale indefinitely.
Plus, there are so many red-flags apart from the valuation. Low promoter holding. Sudden jump in profit margins before the IPO. I’m not going to talk about it in depth, because it’s there on the net for people to read.
Here’s how you should think about IPOs.
It’s a sale — of shares in a business. And the person who is selling it to you, is the owner of that business — do you think they would sell it at a discount so that you can make money off of them?
Verdict
If you’re here to make a quick buck — even at a grey market premium of 23%, I believe Lenskart looks dangerous. If it doesn’t get heavily oversubscribed in the next few days, that premium could drop and you — the retail investor — could be left stranded with some red in your portfolio. On the flip-side, you could also make a quick INR 3-4K. Both probabilities exist.
For a long term investor — this is an easy pass. There are better stocks where your capital can be deployed. Focus on honing your skills and building your knowledge. Read stuff that no one is reading, that is what gives you an edge in this market. Find niches and take calculated risks in those niches.
Ultimately, there’s no guarantee when it comes to investing. We all make calculated bets based on the information that is available to us. And then we wait for compounding to kick in ;)