India IPO Market Surges: Expert Tips for Navigating Risks Amidst High Investor Appetite

India's stock markets are experiencing a significant surge in Initial Public Offers (IPOs) during 2025. As of November 13, 2025, 90 IPOs have cumulatively raised ₹1.51 trillion, narrowly trailing the ₹1.59 trillion raised throughout all of 2024, according to IPO tracker Prime Database.

A recent prominent example is Lenskart, the eyewear retailer, which is planning an IPO at an estimated valuation of ₹70,000 crore. This valuation is approximately ten times its sales and 230 times its FY25 earnings. Despite such high valuations, retail investors have shown considerable appetite, with Lenskart's retail portion seeing a 7.56-times subscription. The overall average subscription for retail books in 2025 stands strong at 24.28 times, indicating robust demand.

However, investing in IPOs carries inherent risks. A key concern is that an issuer's valuation might not align with how the market ultimately prices the stock after its listing. Data from Prime Database reveals that nearly two-fifths of IPOs issued between 2021 and 2025 are currently trading below their initial issue price. This highlights the importance of thorough due diligence.

What to look for

Market experts advise retail investors to focus on fundamental metrics. Deepak Jasani, an independent market expert, notes that most retail investors lack the time or expertise to deep-dive into a company's draft prospectus. He recommends starting with simpler metrics like the Price-to-Earnings (P/E) ratio and Price-to-Book (P/B) ratio, comparing them with listed peers in the same industry. Information on comparable peers can be found in the company's Red Herring Prospectus (RHP), which is publicly available. Investors should also conduct their own research on peer valuations, as RHPs might highlight highly-valued comparables.

For companies that are not yet profitable, traditional metrics like P/E do not apply. In such cases, analysts often use the Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortisation (EV/EBITDA) multiple. This metric helps assess the company's operating performance and underlying earning potential, even when net profits are negative. Enterprise Value (EV) represents the total value of a company, including its market capitalization, debt, and cash and cash equivalents.

Jasani also stresses a conservative approach, suggesting investors look for businesses with strong fundamentals and, ideally, a dividend distribution policy. A track record of dividends indicates a company has passed its high investment phase and can now share profits with shareholders, naturally excluding loss-making companies from consideration. If unsure, it's prudent to wait for a few quarters after listing to assess the company's performance and management's execution before investing.

Flipping Behavior

Retail investors often focus on short-term listing gains rather than long-term potential. A study by the Securities and Exchange Board of India (SEBI) found that about 54% of IPO shares (by value, excluding anchor investors) were sold within a week of listing between April 2021 and December 2023. Retail investors sold 42.7% of their allotted shares within a week during the same period, with higher exits occurring when first-week returns exceeded 20%.

G Chokkalingam, founder and head of research at Equinomics Research, advises caution even for those seeking listing gains. He suggests limiting exposure to steep valuations, cutting losses immediately if a company lists at a discount, and booking profits quickly on listing day gains.

Pranav Haldea, managing director of Prime Database, emphasizes the need for investors to clarify their strategy – seeking listing gains or long-term investment. He notes that individual investors tend to be slower to exit when returns disappoint (only 23.3% of shares were exited when returns were negative in the first week), making the pursuit of quick gains particularly risky.

Reading the RHP

The RHP provides crucial details about a company's business. The 'About our company' section helps understand the business model, products, services, customer base, and growth plans. Investors should check if the company operates in a fast-growing industry and possesses unique advantages or is merely one of many players. Pankaj Pandey, head of retail research at ICICI Direct, advises assessing industry size, growth runway, market share, brand strength, technology edge, regulatory licenses, distribution networks, and cost advantages. This section also reveals the dividend policy.

The 'Financial Information' section requires looking for steady revenue and profit growth, expansion plans (capacity, new geographies, product launches), customer acquisition strategies, improving profit margins, and strong cash flows. Red flags include profits on paper with consistent negative cash flows, a highly leveraged balance sheet, frequent loan refinancing, and over-dependence on a few customers or suppliers. Investors must also scrutinize governance and promoter quality, including their track record, related-party transactions, and pending litigations. The use of IPO proceeds is also critical; funds for expansion or debt reduction are healthy, while using them for promoter exits can be a concern.

What should investors do

Investing directly in IPOs is riskier than investing in established stocks, especially with limited disclosure periods (typically three years of financial statements). Mutual funds offer an indirect route, with fund managers often participating in anchor books and conducting thorough research. Bharat Lahoti of Edelweiss Mutual Fund highlights their process of tracking and reassessing newly listed companies.

Vishal Dhawan, founder of Plan Ahead Investment Advisors, educates clients about IPO risks, particularly high valuations and promoter exits, and shares long-term views for informed decisions. Ultimately, navigating the IPO market can be complex for retail investors; a diversified mutual fund that invests in select IPOs is often the most suitable approach.

Impact

This news has a significant impact on the Indian stock market by highlighting the current IPO boom, the associated risks, and providing guidance for investors. It influences investor sentiment towards IPOs, potentially leading to more informed investment decisions and a more cautious approach to high-valuation offerings. The analysis of investor behavior (flipping) and advice on due diligence can shape how retail investors participate in the primary market, potentially reducing speculative trading and encouraging long-term investment.

Rating: 8/10

Difficult Terms

• Initial Public Offer (IPO): The first time a private company offers its shares to the public, becoming a publicly traded company.
• Valuation: The process of determining the current worth of an asset or a company.
• Sales: The total revenue generated from the sale of goods or services.
• Earnings: The profit a company makes after deducting all its expenses.
• Subscription: The process by which investors apply for shares in an IPO. A subscription rate indicates how many times the offered shares have been applied for.
• Retail Investors: Individual investors who buy and sell securities for their own account, rather than for a company or institution.
• Issue Price: The price at which shares are offered to the public in an IPO.
• Listing: The process of a company's shares being admitted for trading on a stock exchange.
• Red Herring Prospectus (RHP): A preliminary prospectus filed by a company before an IPO, containing details about the company and the offering, but some information (like price and number of shares) may be incomplete or subject to change.
• Price-to-Earnings (P/E) Ratio: A valuation ratio that compares a company's current share price to its per-share earnings. It indicates how much investors are willing to pay for each dollar of earnings.
• Price-to-Book (P/B) Ratio: A valuation ratio that compares a company's market capitalization to its book value. It indicates how much investors are paying for the company's net assets.
• Listed Peers: Companies that are publicly traded on a stock exchange and operate in the same industry or sector as the company being analyzed.
• EV/EBITDA Multiple: A valuation metric that compares a company's enterprise value to its earnings before interest, taxes, depreciation, and amortization. It's often used to compare companies across different capital structures.
• Enterprise Value (EV): A measure of a company's total value, often used as an alternative to market capitalization. It includes the value of a company's equity, debt, and minority interest, minus cash and cash equivalents.
• Dividend Distribution Policy: A company's stated policy regarding how it will distribute profits to shareholders in the form of dividends.
• Anchor Investors: Large institutional investors (like mutual funds or pension funds) who commit to buying shares in an IPO before it opens to the public, often at a fixed price.
• Flipping Behavior: The practice of buying shares in an IPO and selling them quickly after listing, usually to book short-term profits, rather than holding them for long-term investment.
• Promoter: The individual or group who founded the company and typically holds a significant stake and control over it.
• Auditor Remarks: Comments or qualifications made by the company's external auditor in their audit report, often indicating concerns about financial reporting or internal controls.
• Litigation: Legal action brought against a person or entity.
• Related-Party Transactions: Financial transactions between a company and its executives, directors, or major shareholders, which can sometimes be non-market based or raise governance concerns.
• IPO Proceeds: The money a company raises by selling its shares to the public in an IPO.