Market: Riding The IPO Wave

The market for initial public offer (IPOs) continues its impressive surge in the fiscal year 2024-25 (FY25). In just the first five months, a remarkable almost Rs 60,000 crore has been raised, with over 135 IPOs launched, and several more waiting to be launched. So far, nearly 80 per cent of these IPOs have originated from small and medium enterprises (SMEs). Despite the dominance in numbers by SMEs, mainboard IPOs have contributed nearly 90 per cent of the total funds raised, highlighting the significant financial heft these larger offerings bring to the market.

To put this in perspective, in the entirety of FY24 (April 2023-March 2024), there were 78 IPOs that collectively garnered Rs 67,561 crore. The total investor response during this period was staggering, with expressions of interest amounting to Rs 23,96,670 crore. "This translates to an oversubscription rate of 35.47 times," says Mahavir Lunawat, Managing Director of Pantomath Capital Advisors. He further explains that the average IPO size was below Rs 1,000 crore, accounting for the high volume of IPOs seen during FY24.

The sustained IPO boom can be attributed to several factors. Market experts point to favorable market conditions, robust economic growth, easing inflation, and stable interest rates as primary drivers. "The biggest reason is India's strong macro environment, which has raised investor confidence," states a senior market analyst. The performance of many newly listed stocks over the past one to two years has also enticed investors, hoping for similar returns from new IPOs.

However, amidst this celebratory atmosphere, a note of caution is warranted. The rapid influx of IPOs, especially from SMEs, raises questions about the long-term sustainability and valuation metrics. Investors are urged to perform thorough due diligence and not be swayed solely by short-term gains. The enthusiasm in the market is palpable, but so is the need for prudence. As the market continues to thrive, maintaining a balanced approach will be key to ensuring that this boom translates into lasting economic benefits and growth.

In fiscal year 2024, India witnessed an unprecedented surge in Demat accounts, with nearly 3.7 crore new accounts opened—an average of over 30 lakh per month. This record-breaking increase highlights the growing investor engagement in the capital markets. Concurrently, while gross inflows through systematic investment plans (SIPs) surged by 28 percent in FY24, net SIP inflows experienced a more modest growth of 4.9 percent due to a significant rise in redemptions. Mutual funds recorded net SIP inflows of Rs 87,971 crore for FY24, up from Rs 83,873 crore in FY23. These dynamics collectively contributed to a buoyant IPO market, reflecting an overall robust investment environment.

Big Gains
Based on the analyses of data from capital markets, the first half of 2024 (H1CY24) saw around 35 mainboard IPOs, with 27 debuting at a premium. Noteworthy performances included Vibhor Steel Tubes and BLS E-Services, gaining 193 per cent and 175 per cent, respectively, on their listing days. In fact, 21 mainboard IPOs enjoyed listing gains of at least 10 per cent, with most continuing to trade positively.

In the new fiscal year starting April 1, take for example Bharti Hexacom shares, which made an impressive debut on April 12, listing with a 32.4 per cent premium at Rs 755 compared to the IPO price of Rs 570. In fact, the listing gains significantly surpassed analyst estimates of a 12-15 per cent premium. In nearly four-month post listing, the share price was up nearly 90 per cent compared to its listing price. Bharti Hexacom IPO was a book built issue of Rs 4,275 crore. The issue was an entirely offer for sale of 7.5 crore shares. Bharti Hexacom, a subsidiary of Airtel, operates in the Rajasthan and North East telecommunication circles in India boasting a robust market position with a large customer base.

Similarly, the shares of TBO Tek, India's leading travel distribution platform, made a stellar entry on the bourses on May 15 as it listed at Rs 1,426 at NSE, a premium of 55 percent over the issue price of Rs 920. It raised Rs 1,550.81 crore through a mix of fresh issue of shares worth Rs 400 crore and an offer-for-sale of shares worth Rs 1,150.81 crore. Qualified Institutional Buyers (QIBs) demonstrated the highest interest, subscribing 125 times their allotted portion. Non-Institutional Investors (NIIs) subscribed nearly 50.60 times their quota, while retail investors subscribed almost 26 times their allocated shares. In around 75-days post listing, the stock price had appreciated nearly 80 per cent from its issue price.

These are just a couple of examples of strong gains for companies who got listed in the current fiscal. There are several more examples across mainboard and SME IPOs. But not all stories are similar. Take for example Ola Electric Mobility's IPO that opened from August 2 to August 6. It offered shares at Rs 72-76 each with a lot size of 195 shares. The company raised Rs 6,145.56 crore, including a fresh share sale of Rs 5,500 crore and an OFS of up to 8,49,41,997 shares. The issue was only subscribed 4.27 times overall, with QIBs at 5.31 times, NIIs at 2.40 times, and retail investors at 3.92 times. The grey market premium crashed due to market sentiments and a muted response, stock analysts reported.

Tread with Caution
While robust retail buying highlights domestic investors' bullish stance on India's growth, experts urge caution. There's concern over the irrational exuberance of retail investors chasing short-term gains without considering valuations and business fundamentals. Investors are advised to thoroughly evaluate IPOs, focusing on long-term growth potential rather than immediate gains. Overall, the Indian IPO market remains active with broad investor participation. "While investing in IPOs can offer opportunities for significant gains, it's essential to approach them with caution, especially in uncertain market conditions. Conduct thorough research, assess your risk tolerance, and consider seeking advice from professionals to make informed investment decisions," underlines Lunawat of Pantomath Capital Advisors.

SME IPOs Aplenty
The fervor surrounding IPOs, particularly from small and medium enterprises (SMEs), has dramatically intensified, garnering overwhelming interest from both retail and non-institutional investors. Following a record IPO count in 2023, this momentum persists into 2024. According to an industry report, 153 companies debuted in H1FY24, with 77 per cent from the SME sector—a 67 per cent increase from last year’s 70 SME IPOs. These enterprises aim to meet debt obligations, fund expansion initiatives, and fulfil working capital needs, as outlined in their Draft Red Herring Prospectuses (DRHPs).

Notably, offer-for-sale (OFS) transactions have outpaced fresh capital issuances, as private equity (PE) and venture capital (VC) investors leverage favourable secondary market conditions for exits via primary IPOs and secondary block deals. The surge in SME IPOs has caught the attention of SEBI and the exchanges, leading the National Stock Exchange to impose a 90 per cent price control cap on listing-day gains for SME IPOs. This measure addresses concerns over market froth, highlighted by instances such as Shivalik Power’s debut with a 211 per cent premium. Investors are keenly monitoring grey market premiums to gauge listing-day performance, with some basing their IPO participation decisions on these indicators.

Reforms on Way
Market regulator, the Securities and Exchange Board of India (Sebi), is unveiling a suite of tech-driven initiatives to streamline processes and encourage innovation. Recently, at the Capital Markets Conference, Sebi Chairperson Madhabi Puri Buch highlighted several key reforms aimed at boosting the efficiency and accessibility of India's financial markets. Central to these reforms is a "demystified IPO document," a template-based approach to simplify the listing process. "We are creating a template fill-in-the-blank IPO document," Buch explained. "With this, we believe that the document will be precise; it will be meaningful because it says here are the 50 things which are necessary for an investor to make a decision."

Moreover, Sebi is harnessing advanced technology to further revolutionize this process. "We are implementing artificial intelligence for processing public documents, and AI does 80 per cent of the work," Buch stated. This AI-driven approach will extend to IPO documents as well. "We are working, as we speak, on AI-based processing of IPO documents," she added.

Addressing concerns surrounding IPOs, Buch acknowledged that this has been "an area of concern" for recently listed companies, particularly regarding the disclosure of Key Performance Indicators (KPIs) in offer documents. To tackle this, Sebi has referred the matter to the Industry Standards Forum (ISF). "We have now shared our concerns, and the industry has shared their concerns," Buch noted, expressing confidence in finding a "win-win situation."

Ashishkumar Chauhan, MD & CEO of NSE, highlighted the surge in retail investor participation, with ten crore direct investors now representing 20 per cent of Indian households. He attributed this growth to enhanced corporate governance and increased investor trust. Chauhan also lauded India's market infrastructure, stating, "The transaction processing framework of India is now the best in the world."