Despite the criticism and below-the-belt jibes, the hoopla won. Lenskart’s Rs 7,000 crore-plus IPO (Initial Public Offering) was oversubscribed on the first day. However, damning questions still hang in the air, as experts, investors, and media take opposing and staunch stances on several issues related to the IPO. One of the first is related to its profitability. In 2024-25, the company became profitable, with nearly Rs 300 net profit, after a loss of Rs 10 crore in the previous year. A tongue-in-cheek article uploaded on a website explained the mini-miracle. Although revenues grew by 23 per cent in a single year, most of the profit came from non-operational sources. For example, in 2022, Lenskart purchased 93 per cent of a Japanese chain and promised to buy the remaining 7 per cent. This ‘remaining’ remained on its books as a liability. In 2024-25, it purchased a further 4 per cent, which reduced the liability, and “counts as profit on paper, even though no cash came in.”
This minor liability adjustment added almost Rs 170 crore to the profit, out of a total of nearly Rs 300 crore. Another Rs 8 crore was earned due to favourable exchange rates, and an additional Rs 14 crore was booked as deferred tax credit. The latter means that the company provided for more taxes earlier, ended up paying less, and booked the difference as profit. This takes the non-operational profit part to Rs 190 crore or so. The profit due to operations is therefore just over Rs 100 crore. This too has come coincidentally in the year preceding the IPO, although the company has been in existence since 2008. For 16 years or so, it incurred losses. Then boom, there is a sizable profit, largely led by non-operational and one-time incomes. Even the revenue increase is inorganic, largely due to acquisitions. One needs to congratulate the promoters on the timing of the Japanese acquisition, profit growth, and the IPO.
However, a few experts question whether the financials, even if the turnaround is accepted, mandate the valuation that the company seeks. At Rs 70,000 crore, the worth of Lenskart is 10 times its sales and 230 times its earnings. A revenue growth of 20-30 per cent, coupled with a first-time profit, which may grow in the same band for the next few years at most, does not imply such valuations. The company disagrees and contends that it is ahead of the competitors, whose revenues are two-thirds lower, and it is “building future tech (which includes) smart glasses, audio eyewear, and AI-powered products.” In addition, it has a tie-up with Qualcomm for next-gen smart glasses. In effect, the potential investors pay for future potential. This is true in the case of most IPOs, as well as already-listed firms. Current valuations and stock prices are driven by financial estimates over the next 1-3 years. So, there is nothing wrong if the investors are asked to pay high today and reap benefits later.
But there is another catch. In July this year, or just four months ago, the company was valued at under Rs 9,000 crore. What explains the eight times increase in its worth? Inexplicably, the promoters purchased stakes at an unbelievably low price a few months ago. Now, they will cash out partially at a massive profit. Of the over Rs 7,000 crore from the IPO, the bulk, or more than Rs 5,000 crore, will be earned by the promoters, who will sell a part of their stakes. Their holdings will drop from 20 per cent to 17 per cent post-IPO. Just over Rs 2,000 crore will be left with the company to pursue business growth. So, is the IPO essentially aimed to benefit the promoters? One cannot blame Lenskart's owners. In the Tata Capital IPO, half the proceeds went to Tata Sons, the promoter, and not to the company. An IPO is an ideal time to cash out for the promoters and other investors, such as angel investors, venture capitalists, and private equity players. This is how the game is played.
For some renowned investors like Shankar Sharma, the current IPO game is a “dumb one,” which burns the hands of mostly retail investors and a few institutional ones. One of the tricks of the sport is to justify high valuations through what behaviour science experts dub as the anchoring bias. In simple terms, if an individual is provided with a price anchor, say, a similar product that recently sold for Rs 5,000, he or she is likely to price a new one around that price, whether lower or higher than the anchor. If the anchor price is low, the likely worth of a new but similar item drops. In the case of IPOs, deals done before the launch with anchor and marquee investors set the anchor price, which is high. In the case of Lenskart, it was Rs 400 a share, or near the upper bracket of the final offer price. Hence, investors are comfortable with the high valuations, and plunge in. Later, as Sharma alleged, unless one takes the advantage of listing gains, the price falls, as is the case with past IPOs. In media interviews, Sharma categorically states that the Indian IPO market is the “dumbest in the history of IPO markets” and driven by “dumb money” from retail investors, who love to play this “beautiful game.”