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After a subdued beginning to 2023, the IPO market has seen heightened activity in the past couple of months. Considering the strong pipeline, there’s hope this may continue for some time yet
“Good, but can do better.” This clichéd response is a ritual at parent-teacher meetings in schools. Now, though, it has also become a constant refrain in one unlikely place: the primary market.
Ask any market participant now about the primary market, and pat comes the reply: It’s doing fine, but it can definitely do better in the months ahead.
This is because there has been a notable increase in primary market activity, led by small and medium enterprises (SMEs), coming after two roller-coaster years when market participants first experienced exhilarating highs in 2021 before activity tapered and then plunged by the end of 2022. But there is a glimmer of hope that the strong pipeline of initial public offerings (IPOs)—or public issues in local parlance—could spark a repeat of 2021. IPOs worth over Rs 80,000 crore are waiting to be launched.
While there are many factors that trigger a rush to go public, investor sentiment, especially in the secondary market, plays a key role...As a result, we will hopefully see several public issues hitting the market in the near future
Pranav Haldea
Managing Director
Prime Database
This cautious optimism, to use a staple of marketspeak, has taken a while to build because 2023 began with a visible lull in the primary market—the section of the market where new or unlisted companies get listed on the stock exchanges through IPOs. Then in March, a slow trickle of IPOs began—just two to three a month—that has gained volume and momentum to the extent that there were around 20 IPOs—including mainboard and SME issues—in September. This included public issues of well-known companies like JSW Infrastructure and Yatra Online.
The primary market spurt has mirrored the movement of the benchmark indices this year. In the second quarter—April to June—the Sensex and Nifty clocked more than 2 per cent gains in each of the three months. The 30-share Sensex and the broader 50-share Nifty scaled their respective record highs of 67,927.23 and 20,222.45 on September 15. The Sensex has gained 7 per cent from the beginning of this year through September 28. Meanwhile, broader indices like the BSE MidCap and BSE SmallCap have gained over 25 per cent and 28 per cent, respectively, in that period.
But though the pace has picked up in the primary market, the 2023 report card pales in comparison with the previous year, and especially 2021, which was a record year in terms of funds raised through IPOs. Till August this year, a little over Rs 15,000 crore has been raised through 20 mainboard IPOs. Add to it another Rs 2,500 crore that was raised via IPOs on the SME platform, and the total is around Rs 17,500 crore. In comparison, more than Rs 61,000 crore was raised in 2022 through nearly 150 public issues, and nearly Rs 1.20 lakh crore was raised via 122 IPOs in 2021, the only calendar year till date when more than Rs 1 lakh crore has been raised through primary issuances.
This spurt in IPOs is because of enhanced global confidence in India’s robust economy. Investors are betting big on the potential upside the debutant stocks offer when compared to their listed peers
Mahavir Lunawat
Managing Director
Pantomath Capital Advisors
To go public, firms must first submit a draft document—called the draft red herring prospectus (DRHP) that includes all key information related to the company—to the capital markets regulator, the Securities and Exchange Board of India (Sebi), which gives its approval after checking that all the required due diligence has been done. This approval is valid for one year. In other words, the company has a window of 12 months from the day Sebi approves its IPO to launch the offer.
Data from primary market tracker Prime Database shows that there are nearly 70 companies that are in different stages of going public, with more than two dozen companies even ready with regulatory approval to launch their IPOs. Meanwhile, there are over 40 companies that have filed their DRHPs with Sebi and are awaiting the regulatory nod.
Pranav Haldea, Managing Director of Prime Database, says while there are many factors that trigger a rush to go public, investor sentiment, especially in the secondary market, plays a key role. “The primary market follows the secondary market, albeit with a lag. As a result, we will hopefully see several public issues hitting the market in the near future,” says Haldea.
“We have seen in the past as well that not all the approved IPOs will hit the market,” he says. Factors like investor appetite, the valuation expectations of promoters, and a downturn in the secondary market could impact the final decision. “Soon, the focus [will] also shift to the upcoming general elections, and you will see issuers adopting a wait-and-watch approach till the election results are out,” he adds.
Indeed, there are ample examples every year of companies that go through the complete backend process of launching an IPO but finally decide against it. This year has been no exception. As many as 29 companies have let their Sebi approvals lapse so far this year. This is slightly higher than last year’s count of 24.
That aside, the current pipeline, while quite robust in terms of numbers, is equally strong in terms of names as well. Companies like EbixCash, Tata Technologies, Tata Play, IndiaFirst Life Insurance Company, Biba Fashion, Allied Blenders & Distillers, and Protean eGov Technologies have already received regulatory approval for their respective public issues and plan to raise anywhere between Rs 1,500 crore and Rs 6,000 crore each, per Prime Database data.
It is imperative to exercise caution when valuationsare elevated, since there isa possibility of subpar firms seeking valuations that are higher than what would be prudent... it isanticipated that this market will gradually return to a more rational state
Kulbhushan Parashar
Founder and Managing Director
Corporate Capital Ventures
Further, there are names like Oravel Stays (OYO), National Securities Depository Ltd (NSDL), Go Digit General Insurance, Muthoot Microfin, Cello World, Fedbank Financial Services, and Jana Small Finance Bank that have filed DRHPs and plan to raise well over Rs 1,000 crore each and are awaiting Sebi approval.
Mahavir Lunawat, Managing Director of Pantomath Capital Advisors, a mid-market investment banking firm, believes this spurt in IPOs is because of enhanced global confidence in India’s robust economy.
“Investors are betting big on the potential upside the debutant stocks offer when compared to their listed peers,” says Lunawat. Besides, fund inflows from foreign institutions and predictions of a normal monsoon are some other factors that have aided market buoyancy. “Incidentally, the number of IPOs hitting the street is also linked to the financial reporting cycle; September is the last month for [submitting] March 2023 financials,” he adds.
The recent spurt in activity has been such that it has put India in pole position globally in terms of the number of IPOs in the first eight months of 2023, according to an analysis by data analytics and consulting firm GlobalData. And people are taking notice. A recent report by consulting major EY stated, “India is another standout market, showcasing strong growth in IPO volume, especially from SMEs.”
“India has continued to increase its share in the global IPO number, from 6 per cent in 2021 to 11 per cent in 2022, and further increasing to 13 per cent YTD (year-to-date) in 2023,” the report stated, adding that the “surge is largely due to SME IPOs showcasing the underlying entrepreneurial activity”.
Indeed, the IPO story of 2023 appears to be as much about the small firms as it is about some of the big names. SMEs have raised over Rs 2,500 crore this year in over 100 issues, making it the best calendar year in terms of total fundraising—bettering the previous record set in 2018 when Rs 2,287 crore was raised through 141 SME IPOs.
In terms of the number of issues, too, this has been a good year. It is the fourth time that there have been over 100 SME IPOs in a calendar year since the BSE and the National Stock Exchange launched dedicated segments for listing such firms in 2012. In these years, the segment has grown by leaps and bounds, with nearly 850 such entities listed on the bourses that have raised over Rs 11,000 crore cumulatively.
September 2023 has been a great month for IPOs on the mainboard and also the SMEplatform, but going forward, expect the flurry of activity to reduce significantly as we get closer to the general electionsslated for April–May 2024... I believe the window for mainboard IPOs would at best be open till February, with some spillover in March
Arun Kejriwal
Founder
Kejriwal Research & Investment Services
Though market participants are united in saying the BSE and NSE platforms have been a big boon for the vast SME segment, there is a view that the segment has become a magnet for entities looking to create artificial demand and push up stock prices.
Just recently—September 25, to be precise—the two exchanges announced additional surveillance measures in the SME segment to bring stocks into the trade-to-trade settlement mechanism. Simply put, this mechanism is seen as a way of curbing speculative trading as non-delivery trades—trades done without the intent of taking delivery of the stocks; also known as intra-day trades—are barred. Plus, it also entails higher margin requirements.
“As per Joint Surveillance Meeting of Exchanges and Sebi, the existing Trade for Trade (TFT) Framework shall be extended to Small and Medium Enterprises (SME) stocks subject to certain changes… It may also be noted that the shortlisting of securities under TFT is purely on account of market surveillance, and it should not be construed as an adverse action against the concerned company/entity,” stated circulars issued by the two exchanges.
Incidentally, the segment has seen many instances of issues getting subscribed hundreds of times and stock prices registering a sudden and swift rise—often in the absence of supporting growth in the fundamentals of the company.
“This is a time for the stakeholders to step back and [take] a serious deep-dive review. We need to imbibe robust market practices led by high governance standards. We expect more regulatory changes in this market segment,” says Lunawat, whose investment banking firm has managed the highest number of SME IPOs till date.
It is widely believed that the recent checks put in place by the exchanges are just the start of a series of actions aimed at keeping mischief-makers at bay. This could impact the growth of the segment in terms of IPO flow, but will benefit investors in the long term.
To start with, these measures are expected to make the pricing of SME IPOs and demand for shares more realistic. This is significant because though the pace of activity is picking up, there is a feeling that the window of opportunity may be short and markets may turn volatile as election fever takes hold and investors turn selective.
“September 2023 has been a great month for IPOs on the mainboard and also the SME platform, but going forward, expect the flurry of activity to reduce significantly as we get closer to the general elections slated for April–May 2024,” says Arun Kejriwal, Founder of Kejriwal Research & Investment Services. “I believe the window for mainboard IPOs would at best be open till February, with some spillover in March.”
The IPO arena may be enjoying its best phase this calendar year, but companies and merchant bankers need to be cautious in terms of the timing and pricing of the issue. These past few years have taught investors many lessons, especially regarding new-age companies as firms like Zomato, Paytm, Policybazaar, and Nykaa entered the public markets in 2021 and 2022.
This year, Yatra Online debuted on the bourses, while the likes of Oyo, Mamaearth, and Go Digit General Insurance are in the process of entering the public markets. These firms appear to have learnt the lesson, especially from the post-listing performance of those that went public in the past two years and witnessed a huge fall below their issue price. Such has been the impact that it still plays a role in how companies with a primarily digital presence price their shares. “That obviously plays a role in pricing, as it ultimately gets determined by market forces,” says Dhruv Shringi, Co-Founder & CEO of Yatra. “Key constituents and market forces have become wiser after what happened. So, pricing is a lot more rational today than it was two years ago,” he adds.
Pricing is not the only aspect that has come under scrutiny. Kulbhushan Parashar, Founder and Managing Director of advisory firm Corporate Capital Ventures, believes it is imperative to exercise caution when valuations are excessively elevated, since there is a possibility of subpar companies seeking valuations that are higher than what would be prudent. “Various industries and thematic stocks may receive valuations that surpass their intrinsic worth. Nevertheless, it is anticipated that this market will gradually return to a more rational state,” he says.
Lunawat says there’s now a clear trend of issues that are fairly priced attracting huge market response, while those that aren’t are barely getting subscribed.
Though there has been a flurry of issues, none of the mainboard IPOs this year are expected to make it to the top of the league in terms of overall subscription numbers. One reason for this, analysts feel, could be the bunching up of issues. Others feel this is just an indication of investor interest. “We do tend to launch issues once we see enough interest from the launch perspective for the overall deal. I don’t think there is an intentional case where we want to bunch a lot of issues in a particular month or anything like that,” says Vishal Bangard, Vice President at IIFL Securities.
Views may differ, but one thing is certain: investors have learnt the hard way in recent years and will pick stocks based on factors like pricing, business model, and outlook for the sector.
Companies will do well to keep this in mind. The window is short, and the clock is ticking.
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