The year 2021 could be termed as the year of initial public offerings (IPOs). On the back of market euphoria, high liquidity and increased retail participation, over 60 mainboard IPOs (companies with a minimum post-issue paid-up capital of Rs 10 crore) have raised money from the primary market through IPOs.
According to the EY Global IPO Trends Report of December 2021, “In India, year-on-year IPO activity increased 156 per cent and 314 per cent by deal numbers and proceeds, respectively. By proceeds, 2021 represented the best IPO year in India in the last 20 years. Ample global liquidity, strong earnings and increased retail participation were among the main factors driving the markets in 2021.”
The Reserve Bank of India, in its State of the Economy report in August 2021, stated that “2021 could well turn out to be India’s year of the initial public offering (IPO)”. And that seems to have come true.
“Till December 10, the year 2021 has seen 103 IPOs with companies raising Rs 1,12,373 crore, among the highest amounts raised ever in a single year,” says A.K. Prabhakar, head of research, IDBI Capital.
The market will now keenly watch the IPO activity in 2022, especially with some big names, including that of India’s oldest and largest insurance company, Life Insurance Corporation of India, queuing up. Other big names that are set to roll out their IPOs in 2022 include logistics company Delivery (with an issue size of Rs 7,460 crore), Bengaluru-based ridesharing company Ola (Rs 7,300 crore) and India’s largest digital healthcare platform Pharmeasy (Rs 6,250 crore).
The 2021 Story
IPOs remained the buzzword on Dalal Street in 2021, with issues of various new-age technology-driven and emerging sectors hitting the capital markets. The majority of them got an overwhelming response from retail and institutional investors. Some of them even recorded bumper listing on the stock exchanges.
The year also saw the launch of the biggest IPO with Paytm’s parent company One97 Communications raising Rs 18,300 crore. Before this, state-owned public sector unit (PSU) Coal India had raised Rs 15,200 crore in 2010. But the Paytm IPO failed to impress investors. One97 Communications’ shares were trading at Rs 1,348, down over 37 per cent compared to the public issue price of Rs 2,150 per share, as on December 23, 2021.
However, most IPO investors were rewarded with superior gains during the year. As on December 23, 2021, 15 IPOs launched in 2021 were trading at about 100 per cent premium on the National Stock Exchange (NSE) and BSE. Moreover, only 20 of the 59 companies listed so far are trading below the public issue price, according to Outlook Money research.
It was not just the big and well-known brand names of various industries that attracted investors, some of the smaller IPOs also saw a high degree of investor participation. They were subscribed numerous times the shares on offer. For instance, Latent View Analytics, Paras Defence and Tega Industries saw 326.49, 304.26, 219.04 times subscription from investors, respectively.
Will This Trend Continue In 2022?
According to Paul Go, Global IPO Leader at EY, “IPO markets in 2021 proved to be the most active in the past 20 years. Market optimism from the initial rebounding economies, Covid-19 vaccine rollouts and rolling liquidity from government stimulus programs provided strong tailwinds. In Q4 2021, however, the winds shifted with the surfacing of the Covid-19 Omicron variant, continuing geopolitical tensions, new government policies and regulations, and increased market volatility, all of which contributed to muted IPO sentiment.”
In this backdrop, will some big names, which are slated to roll out their IPOs this year delay the launch?
Experts are divided on the IPO activity on Dalal Street in 2022. “How the IPO space pans out in the coming months will depend a great deal on how markets are placed and sentiments thereon,” says Siji Philip, senior analyst, Axis Securities.
Some market experts are more optimistic. Prabhakar of IDBI Securities, says, “In 2022, the flow of IPOs would be very good but investors would be very choosy and pricing should be competitive so that the post-listing market interest is maintained.”
The Big Launch
Is the stage set for the launch of India’s biggest IPO from LIC, which Government of India has been planning for the first quarter of 2022, but which may get pushed to later in the year? Amid media speculation about delay in the IPO, Tuhin Kanta Pandey, secretary in the Department of Investment and Public Asset Management (DIPAM), tweeted on December 19, 2021, “Some media speculation doubting the feasibility of LIC IPO this fiscal year is not correct. It is reiterated that plan is on course for the IPO in the last quarter of this fiscal.”
The government is planning to raise Rs 70,000 crore from the LIC IPO, which is likely to be the biggest IPO in Indian history. “LIC IPO would be an IPO to watch out for given its sheer size and market leadership in life insurance. It will be an IPO in focus,” says Philip.
There are other big launches as well in the pipeline. India’s largest fund house, SBI Mutual Fund, is also planning to come up with an IPO in 2022. The parent company of SBI Mutual Fund, State Bank of India, has got the board’s nod to offload 6 per cent stake via IPO route. “The Executive Committee of Central Board of the bank has accorded approval for exploring possibilities to offload 6 per cent stake of the bank in SBI Funds Management Private Limited through (the) IPO route, subject to receipt of all regulatory approvals,” the lender said in a regulatory filing on December 15, 2021.
Moreover, if market experts are to be believed, India’s largest stock exchange, NSE, is likely to roll out its own IPO next year.
How Should You Approach IPOs?
While 2021 saw a slew of IPOs and much of the same is expected in 2022, investors should avoid getting caught up in the fanfare. One must remember that investing in IPOs is not a passport for wealth creation.
More than 60 per cent of the companies that have come up with IPOs in the last 10 years are trading below the IPO price, according to Outlook Money research. “Many fresh issues are overpriced or correctly priced so that does not leave much for the investor who buys post-listing. A few companies have done well as they were unique and the growth prospect was very good,” says Prabhakar.
Many big names are waiting to come under the market spotlight. But don’t judge an IPO just by its name. Even some of the big names may disappoint you. For instance, the IPOs of Paytm’s parent One97 Communications, CarTrade Tech and Kalyan Jewellers came up with much fanfare, but they failed to impress the market. In contrast, some little-known names, such as Paras Defence and Latent View Analytics gave huge returns in a very short span of time. Even then, listing gains is not the only criteria to assess an IPO. How a company performs in the long term depends on various other factors.
Therefore, an investor must differentiate between listing gains and the long-term outlook of a company.
“An understanding on how the company is placed in terms of various fundamental parameters is necessary. We have seen that companies with unreasonable valuations have not gained much favour,” says Philip.
Read the company’s draft red-herring prospectus, which is like a complete biodata of the company and contains information such as the area of operation, revenue, profitability, the company’s plans on how it will use the IPO proceeds, and so on. Consider its standing among peers in the industry. Look at its competition. Even if you are convinced about the long-term prospects of a company after doing the due diligence, IPOs are not the only way to participate in the market. You can also buy the stock once it lists on the exchanges.