Beyond numbers, India's IPO surge signifies an economic story

In a surge of market activity, around 100 companies from India from the small and medium sectors are gearing up to launch their Initial Public Offerings (IPOs) in the next 12 months.

This wave represents various businesses including car dealerships and domestic stabiliser manufacturers, highlighting a vibrant phase in India’s corporate world. Interestingly, it is expected that out of these, 28 firms will collectively raise an amount of Rs 38,000 crore in the few quarters of this fiscal year. However, this phenomenon goes beyond numbers; it signifies an economic story.

India’s IPO scene has garnered attention as it ranked third worldwide in terms of IPO volume last year. The momentum continues this year, with less-known companies like Popular Vehicles and Services, which owns car dealerships across the country, and JNK India Ltd, which makes heating equipment for the oil and gas industry, joining the fray alongside players such as Snapdeal and INOX.

This trend has been further solidified by EY's report highlighting India’s leadership in IPO numbers for 2023, ranking it the third largest in the world regarding the number of IPOs floated by corporates.

For the third quarter of 2023, over 25 companies have filed Draft Red Herring Prospectuses (DRHPs), demonstrating a solid intent to raise funds in the upcoming quarters. A DRHP is a preliminary registration document that a company files with the regulator, the Securities and Exchange Board of India (SEBI). It consists of information about its business operations, financial details, information about the promoters, the company’s management and the risks involved.

What's driving the surge

Various factors are driving this rush towards IPOs. One significant factor is the anticipation surrounding the general elections in 2024. Market analysts speculate there might be a downturn after the elections, prompting companies to take advantage of the upward market trajectory.

According to Morgan Stanley, the tranquillity in India’s $3.7 trillion stock market is set to be broken as the world’s most populous nation heads to polls in about six months. While the Wall Street bank expects stocks to rise leading to the vote in keeping with recent history, any outcome outside investors’ expectations could spark a slump of as much as 30 per cent in India’s equity benchmarks, strategists including Riddhim Desai wrote in a note on November 13.

The Indian stock market has experienced a 7-10 per cent increase this year, with benchmark indices reaching all-time highs. This positive sentiment has naturally sparked investor interest in IPOs as they look to take advantage of the growth potential offered by promising companies.

The government’s initiatives to foster growth, like the Startup India campaign, have fuelled an innovative spirit. As a result, there has been a surge in start-ups considering IPOs to support their expansion plans.

Adarsh Ranka from EY Global accurately captures this sentiment by highlighting the combination of election capital market involvement and robust economic activity driving the IPO landscape. “The IPO landscape is witnessing a surge in activity driven by an urge to tap the capital markets pre-or-post Indian general elections and strong economic activity, positive domestic and foreign investor sentiment towards India. This momentum is expected to continue well into H2 2024,” says Adarsh Ranka, Partner and Financial Accounting Advisory Services Leader of global consultancy firm EY Global.

The post-pandemic era has further accelerated this trend. The COVID pandemic acting as a catalyst for adoption has brought digitally focused companies to the brink of going public. Additionally, interest in the healthcare and pharmaceutical sectors is expected to influence the IPO market’s trajectory.

Not all IPOs

However, amidst all this activity, it’s important to note that only some IPO stories are successful. While triumphs like Cello World, which makes pens and kitchenware, have rewarded investors handsomely, there have also been disappointments. High-profile IPOs such as Zomato and Paytm have yet to live up to their IPO hype, resulting in investor losses.

The contrasting outcomes in the IPO market highlight the risks and uncertainties involved.

The case of Mankind Pharma, which led the IPO in the half of 2023-24, starkly contrasts start-ups that made big promises but failed to deliver. This difference points to a problem in the start-up funding ecosystem, where valuations often need to find the viability of the underlying business model. While India’s market has embraced the IPO trend, it is essential to exercise caution and discernment.

In the initial half of fiscal 2023-24, Mankind Pharma led the Indian IPO market with a substantial offering of Rs 4,326 crore, setting the pace for others. JSW Infrastructure and RR Kabel were close behind, with IPOs valued at Rs 2,800 crore and Rs 1,964 crore, respectively. In contrast, Plaza Wires took a more modest route, raising Rs 67 crore, the smallest in this period, with the average deal size hovering around Rs 848 crore.

A remarkable story in this IPO landscape is that of Cello World. Known for a range from pens to kitchenware, Cello World’s stock opened 28 per cent above its listing price of Rs 831, catapulting its owner, Pratap Rathod, into the billionaire league almost instantly. The market’s enthusiastic reception of Cello World’s stock can be primarily attributed to its solid fundamentals and the escalating demand for premium kitchenware among India’s burgeoning middle class.

Call for caution

Both investors and companies need to be careful in their approach. As Pranav Sayta from EY India recommends, planning and clear roadmaps are crucial for executing an IPO while maintaining compliance without compromising business objectives.

“India stands out as one bright spot in the present-day global environment compared to most larger economies. It is always wise to start planning well in advance and set a clear roadmap to optimise the tax and other costs of the entire exercise from the standpoint of the company and all stakeholders. This is essential for meeting the desired IPO schedule and ensuring regulatory compliances without compromising business goals,” says Pranav Sayta, Partner and National Leader of International Tax and Transaction Services, EY India.

India’s surge in IPOs represents a story of opportunity, growth and innovation tempered with the necessity for investment and business strategies. The upcoming months will undoubtedly test the resilience and adaptability of India’s investment sectors within this environment.