'A key reason for the strong interest in IPOs has been an increased focus on profitability and reasonable pricing of deals.'
The initial public offering (IPO) market experienced euphoria in November with blockbuster listings of Tata Technologies and the State-owned Indian Renewable Energy Development Agency.
The outlook for next year remains equally robust, according to Nipun Goel, head of investment banking at IIFL Securities, a leading investment bank that has managed deals worth Rs 40,000 crore (Rs 400 billion) since April 2021.
In an e-mail interview with Samie Modak/Business Standard, Goel says the increased focus on profitability and reasonable pricing underpins demand for IPOs.
What are the key takeaways from the recent IPO success?
The market environment has been extremely robust. While the start of the year was tepid amid global headwinds, activity picked up from April onwards, beginning with the Rs 4,300 crore IPO of Mankind Pharma. Since then, there has been no looking back.
Since the start of April 2023, 44 companies have completed IPOs, raising more than Rs 43,100 crore.
This is in stark contrast to the same period last year when only 27 IPOs were completed.
Excluding Life Insurance Corporation of India, the funding through IPOs in 2022 was Rs 26,200 crore.
The current calendar year has also witnessed significant private equity monetisation through block deals in several listed companies.
A key reason for the strong interest in IPOs has been an increased focus on profitability and reasonable pricing of deals.
In 2021, several companies raised capital with a limited track record of profitability, with the price-to-revenue ratio being a key metric in pricing some of them.
Today, the emphasis is on sustained profitability and earnings multiples.
Investors have been discerning in terms of pricing, building in a higher margin of safety while valuing IPO-bound companies.
This also partly explains the fact that of the 46 companies listed this year, more than 90 per cent are trading above the issue price, with median returns of about 40 per cent.
Investors have made gains, boosting confidence and aiding continued deal flow.
What are the big themes that have dominated this year?
The IPO activity has been broad-based across sectors. However, the manufacturing sector has caught investor attention.
About a third of the IPOs this calendar are from the industrial/manufacturing sector.
Other sectors, such as healthcare, consumer goods, real estate, and finance, have also made significant contributions.
The outlook for manufacturing companies remains strong, with many global players looking to expand manufacturing in India as part of the overall Make in India push by the government, the China+1 strategy, and the overall recovery in the capital expenditure cycle.
What is the outlook for 2024? Do you see any sectors or themes dominating?
Markets are likely to witness a robust capital raise next year as well.
There are more than 65 IPO documents filed with Sebi. Of these, 25 have already received approval.
They could launch their share sales as soon as the marketing process is complete, and investor feedback around demand and pricing is received.
Almost half of the draft documents awaiting Sebi's approval pertain to the industrial and financial sectors.
Several new-age companies across platform technology, consumer technology, and payment technology are evaluating IPO plans as well. They are likely to file their offer documents over the next few months.
We hold a strong bullish outlook on the IPO market, extending well beyond 2024.
This optimism is buoyed by robust domestic and foreign investments, driven by superior growth prospects of the Indian markets.
The inflows are expected to gain even more momentum once the uncertainties related to the elections are resolved.
Will startup IPOs make a comeback?
There have been a few new-age businesses that have successfully listed this year.
These include Mamaearth, Yatra and Zaggle Prepaid Ocean Services.
Also, the recovery in share prices of already listed new-age companies is a clear sign of strong investor interest in them.
New-age companies must stabilise their business models and be on a clear path to profitability.
Once this is achieved, the IPO markets will likely experience a strong and steady supply of paper from the new-age sector.
We anticipate that some of them will file their draft offer documents in and around elections to launch post-election results.
Will December be soft due to foreign portfolio investor holidays?
We expect IPO activity to continue until about the third week of this month. At least five companies could launch their IPOs or qualified institutional placements (QIPs) before the year-end holidays.
How has domestic institutional and retail participation in IPOs evolved? Has reliance on overseas investors been reduced?
Participation in the current calendar year has been extremely strong across investor categories. We expect this trend to continue.
The current equity-oriented domestic mutual fund assets under management are worth Rs 27 trillion.
This is driving strong domestic participation in not just IPOs but also in other equity offerings such as blocks and QIPs.
In 2023, on average, 65 per cent of the anchor book was covered by domestic institutions.
How have regulatory changes, such as T+3, benefited the IPO market?
Sebi has been extremely progressive in reforming the capital markets. The recent migration to the T+3 listing is another step in the same direction.
Listing timelines have significantly reduced, and several issuers have voluntarily migrated to the T+3 listing framework even ahead of the regulatory deadline of December 1.
Feature Presentation: Aslam Hunani/Rediff.com
