IPO rush: Is it about building a business?
Dear Readers,
Diwali is an important time for investors as they enter the new Samvat with hopes and trades that set the tone for the year ahead.
But this time the festival is special for the Street as a flurry of IPOs are lined up by companies looking to capitalise on the current market liquidity and investor enthusiasm.
More than half a dozen companies are preparing to raise substantial capital of up to Rs 6,000 crore through initial public offerings (IPOs) in the weeks around the festival.
Ahead of Diwali, which commences on 10 November, companies such as Mamaearth, Cello World, Flair Writing Industries, ESAF Small Finance Bank, Blue Jet Healthcare, Protean eGov Technologies, and ASK Automotive are all in the process of getting ready for their public listings.
One of the bigger ones and eagerly awaited, Tata Technologies, which aims to raise as much as Rs 4,000 crore, is likely to open for subscription in the last week of November, following Diwali.
IPO: Exit for investors?
However, this IPO rush is different from the yesteryears, especially with the new-age startups.
In the past, there were two common questions when the company went for an IPO. What's the size and what are you going to do with the funds? Generally, the companies would say they want to expand and they would like to raise funds for the same. Startups have bought innovation in this format as well. There are many who want to hit the capital market because they want to offer an exit to their existing investors. Good, bad I don't know.. perhaps that's the new trend. But what about building the business? Will an IPO help them build a sustainable business? what's going on.. here are my observations.
The IPO rush
The questions are pertinent as India is likely to cross 100 IPOs by the end of this year. Till now 42 companies have already been listed and a few dozen are getting ready for it. The majority of the newly listed ones are startups and SMEs. About 1,50,000 crore are likely to be raised through IPOs, making the bumper fiscal.
The number of IPOs is steadily increasing over the years. In the fiscal year 2019-20, there were 39 initial public offerings (IPOs) raising a total amount of Rs 37,677 crore. During the fiscal year 2020-21, the number of IPOs increased to 69, raising Rs 74,708 crore.
In the fiscal year 2021-22, there were 76 IPOs that raised a significant Rs 1,30,376 crore. In the fiscal year 2022-23, there was a lull coinciding with the lacklustre secondary market as it saw 56 IPOs, accumulating Rs 63,275 crore.
As of September 30, 2023, in the fiscal year 2023-24, there have been 42 IPOs with a combined amount of Rs 41,846 crore.
Why the rush for an IPO?
When the next 6 months are only about the IPOs the question that I have is, Why is everyone jumping on the IPO bandwagon today? Is it that the companies have no choice but to look at the IPOs as an alternative to exit? Whether all these IPOs will be fully subscribed is another question.
According to my observations, many startups are in dire need of funding. If there is a criterion of becoming profitable before listing, similar to what IRDAI had crafted for insurance companies, I think the majority of the companies will be out as they won't fit the bill of profitability.
The real challenge is funding winter is not yet over. Investors are not funding at the same alacrity and diligence that they were earlier. And the investors who have invested in companies from the seed capital to the mature stage - need an exit.
With the funding crunch severe, new investors are not willing to come at the same valuation. Though many have done it, most companies are loathe to go below the value of their last fundraise. Hence the IPO. Of course, there are exceptions.
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Also, the primary IPO market tends to follow the trajectory of the secondary market. Given the current stability in the secondary market, companies are seizing the opportunity to enter the public market. Well-established companies offered at appropriate valuations generally attract investor interest.
The timing of these IPOs may also be influenced by various factors. With upcoming elections in Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana, and Mizoram starting on November 7 and results expected on December 3, there is a potential for market volatility that could impact valuations. Nevertheless, it is anticipated that the IPO window will remain strong until around December 15 to 22.
Alongside IPOs, the positive market sentiment has facilitated a series of significant block deals from April to September. These deals have allowed both strategic and financial investors to divest their holdings in various companies. Notable examples include Zomato, Paytm, Craftsman Automation, Delhivery, Sansera Engineering, Shriram Finance, HDFC Asset Management Company, and Timken India. These companies have been particularly attractive to investors due to improved macroeconomic indicators and more favourable valuations.
The retail frenzy is also feeding into the IPO, with companies hoping to sail their issues on the support of small investors.
However, investors will still be cautious given the fate of hi-profile IPOs which in the last few years raised huge amounts but stock prices soon halved resulting in losses for the investors.
Zomato, Paytm and Policybazaar are still below the listed price and market value has eroded. However, Paytm has recovered from its 52-week lows, but at Rs 884 it is still far away from the issue price band of Rs 2080 to Rs 2150. Policybazaar price band was Rs 940-980 but it is now trading at Rs 673. Zomato's IPO band was Rs 72-76 but it has managed to rise above it and is trading at Rs 103.
Recently another company that made a good push was Zaggle, trading at Rs 206, up from the price band of Rs 156 -157.
While the investors are bullish, the drop in the market in the last couple of days due to rising bond yields and an escalating Israel-Hamas conflict may sour the IPO party and deter some companies from tapping the IPO mart.
Like always, here are the top 5 stories of the week. Hope you will find it meaningful.
Happy Reading.
Amol Dethe
Editor
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