Behind flashy numbers: How should investors view companies churning profits just before IPOs

In the run-up to a public listing, profitability often becomes the most closely watched number. It is one among several other metrics that gives confidence to investors to go ahead and buy the IPO. But, there is a particular trend emerging for most new-age companies, where the financials show sudden profits in the most recent quarter before the filing.

In FY25, Lenskart reported a net profit of Rs 297 crore on revenue of Rs 6,652 crore. On paper, that’s a turnaround story. However, the reported profit includes a one-time gain of Rs 167 crore linked to its acquisition of Owndays, a Singapore-based eyewear retailer.

After adjusting for this exceptional item, the normalized profit stands closer to Rs 130 crore, translating to a modest net margin of just 1.96%, compared to the reported 4.24%. In Q1FY26, Lenskart posted a profit of Rs 55.6 crore on revenue of Rs 1,940 crore, with a margin of 2.8%, slightly better, but still thin for a company valued at tens of thousands of crores.

The issue is not confined to Lenskart. Urban Company, another consumer-tech startup, reported a Rs 7 crore profit in the quarter before its IPO filing, after years of losses. But in its first earnings after listing, it swung back to a Rs 59 crore loss.

Similarly, Pine Labs, a fintech player, has been narrowing losses over the years, from Rs 341.9 crore in FY24 to Rs 145.5 crore in FY25, but its profit of Rs 4.8 crore in Q1 FY26 came after several quarters of volatility. Analysts say these numbers may not yet reflect a fully stable business model.

Nitin Jain, Senior Research Analyst at Bonanza, noted that, for Groww, quarterly profit growth often hides adjustments. “Headline profit is flattered by one-offs like reversal of incentive payouts. When you strip these out, underlying profit actually declined by around 25% in the latest quarter.”Analysts say the issue is not about legality, but sustainability.According to Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, it’s not unusual for startups to “turn profitable” just before an IPO, often through accounting adjustments or timing of certain expenses.

“It has become a common practice for start-ups to show profitability right before the IPO. However, if the accounting adjustments are within Indian standards, properly disclosed, and backed by auditors and merchant bankers, Sebi’s hands are limited,” Jain said.

She added that disclosure and transparency remain the legal standards, not whether the profit itself is sustainable. “It’s up to investors to read the financial statements carefully. The problem is, most retail investors rely on grey market premium (GMP) and market frenzy, rather than understanding what caused the sudden turnaround.”

Accounting profits can be concerning

Vinit Bolinjkar, Head of Research at Ventura Securities, believes this pattern of last-minute profits is becoming widespread and risky. “The trend of Indian digital startups showing minor profits before IPOs, often due to one-off gains, is widespread and raises investor concerns. These accounting-driven profits can be concerning, as they do not reflect sustainable business earnings,” he said.

Bolinjkar cautioned that while these profits are disclosed, they can still create an overoptimistic view among retail investors. “Investors should focus on cash flows and core operations rather than headline profits. Durable growth and governance transparency are what truly matter for long-term value.”

Veteran investor Sandip Sabharwal in his sharp criticism questioned this trend. “The entire IPO story is becoming murky due to a complete lack of transparency,” he said. “Many companies report profits in the last quarter or the last year before they come for an IPO after being in losses for years. It’s a pattern. Then, the IPO pricing is absurd, and it still gets lapped up by institutional investors,” Sabharwal noted.

What should investors do?

For retail investors, the biggest challenge is distinguishing between a real turnaround and a financial facelift. One-off items, such as asset sales, fair-value adjustments, or accounting gains, can make companies look profitable temporarily.

Khushi Mistry, Research Analyst at Bonanza, says investors must look beyond the headlines. “While one-off gains before IPOs are usually disclosed and thus technically fine, they remain a red flag. These profits should prompt deeper scrutiny into earnings quality and the company’s true value proposition,” she said.

She added that better investor education and stronger post-listing governance are needed. “Regulation alone cannot ensure prudence and that investors must shift focus from short-term listing gains to long-term business performance.”

Several recent listings that came at aggressive valuations have struggled post-IPO. Analysts said a profit before an IPO doesn’t automatically make a company investment-worthy. What matters is whether the business can sustain those profits through consistent cash generation, improving margins, and scalable operations.

Disclaimer: Questions to some of these companies quoted in the story went unanswered.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)