Indian retail investors prove themselves smarter than “dumb” institutional investors with high priced IPOs tanking

Retail investors are generally considered as dumb money while the institutional investors are considered as “smart” money, but apparently this wisdom has reversed in India’s IPO market. Merchant bankers are pricing primary issues at exorbitant valuations, hoping to take advantage of India’s bull market. Tons of IPOs have been floated at high valuations. Most of them have managed to scrape through after the machinations of India’s incestuous investment banking community, where friendly mutual funds are asked to help bail out their merchant banking cousins. With none of their own money involved there is not much at stake for these mutual funds, which put in money in these stupidly high priced issues.

Café Coffee Day was another one such high priced IPO. The company is a loss making one with many of its business segments not making money. Its claim to fame was the coffee retailing division, which is the largest coffee chain in India. Note even this division is not seeing much profit and is also closing down many of its loss making outlets. Coffee retailing has not proved too hot in India, where tea drinking is more prevalent. CCD hardly has got much differentiation or entry barriers to justify this price. With Starbucks making an entry in a JV with Tata Group, it only faces more competition. This did not stop the merchant bankers to price the issue at a very high price. The issue did not get interest from retail investors who could see through the high pricing. Even the recent Indigo airlines IPO saw tepid interest from retail investors, compared to the massive over-subscription by institutional investors. The reason again was valuation which was extremely high, given the top of the cycle being witnessed by the aviation industry today. Even though Indigo airlines is a well-run profitable company, the valuations made little sense.

The Café Coffee Day IPO got only 90% investment from the retail and HNI category, compared to 438% from the institutional investors. Now these investors are suffering from a 15% capital loss on the very first day of the IPO. Note the Indian markets have held up extremely well compared to the other emerging markets, which are deep in the bear territory.

Reuters

Shares in Coffee Day Enterprises (CODE.NS), operator of India’s biggest coffee chain, fell as much as 15.5 percent on its debut on Monday, as investors fretted over a generous price tag they said underestimated concerns around its complex structure.