IPOs likely to queue up as India's primary market revives

After witnessing a melancholic start in the beginning of 2023, the primary market has revived in a big way.

With the performance of the primary market largely being a function of the secondary market’s health, and as the (secondary) market dwindled earlier this year, initial public offerings (IPOs) had also dried up.

Speaking to The Federal on why the primary market was lagging earlier, Amar Ranu, Head – Investment Products & Insights, Anand Rathi Shares and Stock Brokers, said, “The issuers feared that the issue may not sail through, or they may not get the required valuation. The underlying sentiment in the secondary market too drives the mood of the primary market. To a large extent, the liquidity available in the market also decides the primary market’s mood.”

Also, he reasoned that history shows that whenever the listed bourses have seen strong movement northwards, there is a high likelihood of many IPOs hitting the street. And, this is also done by new promoters in order to get rich valuations, and avoid the risk of issues not being fully subscribed, he added.

“But, in the last few months, we have seen a strong bouncing back of equities across all market caps, and the strong macroeconomic data supports the same. Hence, there is a broad-based recovery across the primary and secondary markets,” he explained.

Also read: Now, Indian companies can list on both IFSC and overseas exchanges: FM

Equity markets revive

With equity markets reviving in the past three to four months, and both BSE Sensex and Nifty 50 consistently touching new all-time highs, there has been a plethora of new IPOs hitting the market. These include Tata Play, Tata Technologies, TVS Supply Chain Solutions, Jio Financial, National Stock Exchange, Go Digit Insurance, JSW Infrastructure, Fincare Small Finance Bank, Snapdeal and OYO.

Ranu added, “Investors are flushed with liquidity but hesitate to invest, as the valuations of stocks are not so cheap. So, they are looking for new investment opportunities, which these IPOs bring with them.”

Owing to a large number of new businesses choosing to list themselves on bourses, and improved prospects across various industries, India’s equity market has grown significantly over the past few years. Largely owing to the listing of many new enterprises, a few dormant sectors have been revived, such as banks, home finance companies, pharmaceuticals, chemicals, industrial products, and defence, he added.

The government’s efforts through the PLI and Make in India programmes have inspired numerous businesses to participate in these schemes, eventually listing their shares in the primary market, Ranu added.

“In addition, there are many start-ups waiting to go public. Therefore, there is a good chance that India’s primary market will continue to grow in the future. It is just a matter of time before it happens. We believe that a strong equity market would be the driving force for these IPOs to hit the market,” he said.

What to watch out for in IPOs

The valuation of primary issues or IPOs is influenced by several factors – the company’s financial stability, growth prospects, the sector to which it belongs and how that is faring, the valuation of the company relative to other listed peers, and if there are no peers, how the market sentiments are at that point of time.

Ranu cautioned investors, “One important point that we often miss is looking at how the IPO proceeds are going to be utilised. If these proceeds are going to be used to fund the company’s future activities/projects, and there is some dilution of promoter shareholding, it is a positive signal. However, if there is just going to be a change of hands – like some PE exiting through the listing, and there is no inflow of proceeds to the company’s balance sheet, one should investigate these only on the basis of merit, valuation, and market sentiment, instead of doing anything blindly.”

Also read: Morgan Stanley upgrades Indian markets to ‘overweight’, predicts ‘long wave boom’ ahead

IPO momentum to increase

In a report, Veenit Surana, Partner, EY India had said, “…. The market’s strength is a testament to the Indian economy’s potential for growth. We expect IPO momentum to increase in the future, with domestic and international investors playing important roles.”

The report also stated that there is a strong pipeline for IPOs in H2 2023 and beyond. Around fifteen companies filed their Draft Red Herring Prospectus (DRHPs) in Q1 of 2023, as compared to around ten companies in Q4 of 2022. These include companies across various sectors such as consumer, pharmaceuticals, technology, and financial services.

Speaking of sectors/industries with promise, Ranu said, “It makes sense to invest in public issues of niche sectors like drones, or regular sectors like pharma, small finance banks or housing finance companies in the current market. We believe that the (growth) story will continue; however, it would be purely cyclical, and will correlate with the performance of the equity markets.”