'Anything higher than a P/E of 20-25...': Narayana Murthy’s caution on IPO valuations and spending

Narayana Murthy isn’t sold on India’s IPO surge, warning that the wave of high P/E valuations may be too speculative for comfort. “I don’t understand high price-to-earnings (P/E) businesses,” the Infosys co-founder was quoted as saying in an ET report. 

“I am used to P/E ratios between 7 and 15, maybe 20-25 in exceptional cases. But when people talk about a P/E of 100, it’s speculative for me.” Murthy’s advice for startups cashing in on IPOs is clear: spend carefully, control costs, and focus on market and revenue growth over exuberant spending.

The record-breaking IPO market in India has already raised ₹1.19 lakh crore ($14 billion) this year, topping the previous high set in 2021. Notably, India’s IPO fundraising is the second highest globally, behind the US ($26.3 billion) and ahead of China ($10.7 billion). 

This influx of funds, driven by high demand and excess liquidity, comes as domestic and foreign investors increasingly turn to India’s primary market.

Swiggy’s IPO, closing at ₹11,300 crore, and ACME Solar’s ₹2,900 crore share sale in November, underline the demand, both heavily oversubscribed. “Fund inflows in primary markets are robust,” says V Jayasankar of Kotak Investment Banking, noting that foreign investors remain active in the primary market despite selling in the secondary one.

The year’s top IPOs include Hyundai Motors at ₹27,870 crore and Life Insurance Corporation of India at ₹21,008 crore, along with major entries like Swiggy and Ola Electric. Hyundai’s issue alone broke the previous record, drawing strong participation even amid market volatility.

Investor returns have also been encouraging: 49 of the 68 companies listed this year are trading above their offer price, with several doubling since debut. Investment banker Ravi Sardana credits “strong returns” for boosting investor commitment, expecting IPO momentum to persist.

Retail interest has spiked too, with the total number of demat accounts in India rising to 179 million in October, an increase of 35 million this year. It’s a sign that new retail and high net worth investors are flocking to capitalize on the primary market’s gains.

With IPOs riding high and attracting record inflows, Murthy’s call for cautious spending and market-focused growth sounds a note of caution amid the excitement.