Return Of IPO Optimism
Consider this: some 78 companies are looking to raise more than Rs 1 lakh crore from the primary market this year. Of these, 54 companies with plans to raise Rs 76,189 crore already have the listing nod from the market regulator, the Securities and Exchange Board of India (Sebi), while the remaining 24 companies that are looking to raise more than Rs 35,000 crore are awaiting the green signal.
There is huge activity on the demat account opening front as well. As of April-end, demat accounts totalled more than 11.6 crore, having risen sharply from 4 crore in 2019. On an average, 15-20 lakh new demat accounts are getting added every month. For the uninitiated, demat accounts are necessary for holding investments like shares, bonds, government securities, mutual funds, insurance and ETFs.
"There is a robust pipeline for IPOs in the second half of calendar year (CY) 2023 and beyond in India. After the interim pressure on market sentiments in the first quarter, there has been a rebound in the second quarter with broad indices near life-time highs again and a good momentum being seen in primary market as well," says Nikhil Shah, Director at Beeline Capital Advisors and a chartered accountant by training.
"The Indian public has started diversifying from the traditional investment model to equity investment. Earlier, India was more of a savings economy but now gradually it’s becoming a spending economy which is an obvious sign of accelerated growth of Indian companies," Shah adds.
Many of the companies that have received Sebi approval, including Tata Play, Cyient and others, are ready to hit the primary market soon. What is giving them the confidence?
Experts cite the example of Mankind Pharma’s stellar D-Street listing, which, they say, could signal the revival of retail investors’ interest in initial public offerings (IPO). Kulbhushan Parashar, Founder and Managing Director, Corporate Capital Venture points to the recent back-to-back success of Mankind’s public offering and Nexus REIT. "We are hoping for a primary market revival. We are seeing green shoots of investors’ confidence but they remain cautious and value conscious and it will be a gradual process of recovery. Quality companies tapping the primary markets at right valuation have seen a huge demand by the investors," says Parashar.
Recently, EbixCash received Sebi’s clearance for its proposed IPO. According to reports, the proposed IPO is expected to raise between Rs 6,000 crore and Rs 8,000 crore, making it one of the largest in the financial services sector in India. EbixCash has forex operations in approximately 20 international airports, including Delhi, Mumbai, Mumbai, Hyderabad, Chennai and Kolkata.
Is the IPO Market Reviving?
Calendar year (CY) 2021 saw 63 companies tapping the capital markets and in all raising approximately Rs 1,20,000 crore. The biggest IPOs among these were One 97 Communications (Rs 18,300 crore), Zomato (Rs 9,375 crore), Star Health and Allied Insurance Company (Rs 7,249 crore), PB Fintech (Rs 5,625 crore). While some of these IPOs listed below the issue price, CY2021 bought back positive sentiments in the market after a very subdued CY2020 which saw only 16 companies hitting the capital markets.
In comparison, CY22 was a disappointing year in terms of overall proceeds generated through IPOs. The year saw 40 companies hitting the capital markets and raising approximately Rs 59,000 crore, out of which around 47 per cent of the funds raised was in the financial sector (Rs 27,000 crore).
“The returns generated by IPOs in CY22 were better than the IPOs in CY21,” says Samir Bahl, CEO, Anand Rathi Advisors. “At the end of CY22, nearly 75 per cent of the companies that listed were trading higher than their issue price. Further, the top-10 IPOs of CY22 contributed 72.24 per cent of the total IPO proceeds,” says Bahl.
EY in its latest report on IPO trends has termed the IPO activity as 'stable' with 'brighter outlook'. According to the report, India is positioned first in terms of number of IPOs in Q1 2023 (Jan-March 2023), and there is a strong pipeline of IPOs in H2 2023 and beyond. Adarsh Ranka, Financial Accounting Advisory Services Leader, Partner with an Indian member firm of EY Global says, “India is a bright spot in the global economic landscape. While the IPO activity has remained subdued, companies are using this period to be better prepared for launching their IPOs early next year (pre- or post-Indian general elections).”
Veenit Surana, Partner, EY India says, “The India IPO market has shown resilience and growth in Q1 2023, despite ongoing global uncertainties and relatively smaller issue size. The market's strength is a testament to the Indian economy's potential for growth. We expect the IPO momentum to increase in the future, with domestic and international investors playing important roles.”
Concurs Dara Kalyaniwala, Executive Director, Investment Banking, Prabhudas Lilladher Capital Market (PLCM). "IPOs have delivered 'returns' for investors in the recent past, so I do see mid-sized IPOs, if not priced aggressively, doing well," he says, adding, "The next 5-7 years will be a golden period for India and IPOs will help capital formation and capacity build up."
This bullishness about the growth prospects of the IPO market in the coming years is resonated by Bahl of Anand Rathi Advisors as well. "The need for capital to ramp up capacities and to carry out the long-awaited expansion plans might be the key drivers for the companies to raise capital through IPOs," he says, adding, "Companies with strong cash flows, a good business model and reasonable valuations will still see their IPO plans succeeding."
SME IPOs Shine
In 2022, IPOs by companies that listed on the main board of the stock exchange shrank by almost a third as compared to the previous year. In contrast, listings by small and medium enterprises (SMEs) almost doubled as compared to 2021, as investors opted for SME companies over mainline IPOs lured by the attractive valuations of SME companies in their IPO.
In 2022, 110 SME IPOs were launched as against 65 SME IPOs in 2021 while only 41 mainboard IPOs were launched 2022 as against 65 in 2021. In the year 2022, the largest IPO on main board was by Life Insurance Corporation of India (LIC), while on SME exchanges, the largest IPOs included Rachana Infrastructure, Mangalam Worldwide and Vital Chemtech.
In fact, SME exchanges set a new benchmark in terms of investor response and returns. For instance, the IPO of Pune-based DroneAcharya Aerial Innovations received an overwhelming investor response -- it was subscribed 262 times on the last day, and rewarded investors with listing gains of 88 per cent. The HNI and retail portions were subscribed 388 times and 330 times, respectively.
Similarly, Kolkata-based Annapurna Swadisht, which manufactures snacks and food products, was subscribed 190.49 times and listed at an 80 per cent premium over the issue price. Olatech Solutions, a software solutions company, was another super-hit scrip that was subscribed 598 times, the highest by any company in 2022. It lived up to investor expectations by giving listing gains of 99 per cent, experts point out.
Sectors to Watch
At the time of filing this report, based on the approvals granted by Sebi, around 35 per cent of the proposed issues are from the financial sector while nearly 18-20 per cent are from the consumer discretionary sector. CY 2022 saw the financial sector accounting for 47 per cent of the total IPO market followed by the industrial sector companies (15 per cent) and consumer discretionary (10 per cent).
Kalyaniwala of PLCM has a different take though. "Issues getting interest from investors are sectors which are related to green energy, or e-mobility, environment protection, etc. There are a lot of infrastructure related sectors that may be of interest to investors soon," he says.
"Evidently, the IPO market will be guided by the trends on the secondary markets. If any major industry sector like auto and auto ancillary stocks do well, we could see IPO’s from such sectors," Kalyaniwala adds.
Parashar of Corporate Capital Venture says that companies providing niche product and services rather than commoditised offerings are in key focus this time. "Companies that resolve fundamental problems of today have the best chance to emerge as future business leaders," he remarks.
Regulatory Changes
Regulators are looking to democratise the primary market process with the objective to promote higher retail participation. In this regard, SEBI is looking to cut timelines to make it easier and convenient for retail investors to invest in good companies, while also making the process more transparent. UPI enablement, listing in T+3, non-withdrawal of bids by institutional investors, and streamlining exit by institutional allocations are some of the measures being taken by the regulator by way of reforms.
“Recent amendments like KPI-related disclosures, appointment of credit rating agencies as monitoring agencies, timing for executing the underwriting agreement and proposed change related to reducing the listing timelines to three working days are all aimed at boosting investor confidence,” says Bahl.
Explaining further, Kalyaniwala of PLCM says, “There is a move to shorten the time-frame between closing an IPO and allotment-cum-listing. This will prove a challenge but can be addressed. After seeing the IPO of LIC being wrongly priced, there is need for the regulator to take measures which can arrest the rampant over-pricing of IPOs.”
In the SME segment, many powers have been given to the exchanges, and as such stock exchanges frame their policies over and above Sebi regulations. “Recently we have seen NSE changing the policy related to SME companies migrating to the main board. According to the new circular issued by NSE on April 20, 2023, SME companies will have to wait for three years now to migrate from the SME platform to the main board of NSE against the Sebi requirement of minimum two years. Additionally, companies with a net worth of Rs 50 crore and more than 1,000 shareholders will only be eligible to migrate to the main board,” says Shah of Beeline Capital Advisors. “Due to this circular, we can see fewer companies migrating to the NSE main board over the next few years. BSE has not issued any circular after this. Many more reforms/ policy changes are expected this year from the regulators,” Shah adds.
All in all, if all goes well, more companies will get listed on the bourses in the next 10-12 months as sections of the economy get into a faster growth trajectory thereby needing more funds to fuel the next phase of growth. Watch this space for the latest developments in the stock markets.
