For IPOs, 2022 could be a blockbuster year
Without a doubt, 2021 will be remembered as the most spectacular year for initial public offering (IPO).
India’s IPO ecosystem is flourishing on the back of ample liquidity, rising retail participation, low global interest rates, and more.
Despite the uncertainties caused by the Covid-19 pandemic, a large number of companies have turned to primary markets to raise funds.
According to a report, the number of domestic public issuances on the NSE has increased by 113.3 percent since 2019.
This year’s domestic IPOs have raised $13.4 billion. Even the $10.5 billion raised in 2017 pales in comparison.
This shows us how crazy the IPO craze is in 2021. But the question is, will this trend continue into 2022?
In an effort to give you an overview of India’s IPO boom for now and next year, we’ve reached out to Pranav Haldea, Managing Director at Prime Database Group.
In this conversation, Pranav presents some pretty compelling data points.
Keep reading for a very in-depth interview…
Equitymaster – 2021 was a record year for IPOs. Please can you put this into perspective of those crazy IPOs before.
Pranav – The primary market always lags the secondary market, albeit with a lag. The bullish secondary market is always followed by a series of IPOs, and in this context, the story is the same in 2020 and 2021.
As we all know, the secondary market hit a historic low in March 2020 because of Covid.
Since then, we have seen a strong rally in the secondary market, which has now reached an all-time high. The primary market started operating in July 2020, 3-4 months after the rally of the secondary market.
The year 2021 though will be remembered for a number of reasons:
– Almost double the previous best year IPO (2017) raised in 2021. Rs 1.2 lakh crore compared to Rs 68,830 in 2017.
– IPOs from the new era lose money for tech startups. Zomato followed by CarTrade, Nykaa, Policybazaar, Paytm, etc
– Largest ever IPO in Indian IPO market history from One 97 Communications (Paytm) at Rs 18,300 crore.
– Retail activities participated strongly with 6 IPOs attracting more than 30,000 retail applications.
– Large listing profits in IPOs.
Equitymaster – Do you think the dangers of Omicron could threaten the IPO market in the future? Have you seen any samples that confirm or deny that?
Pranav – As mentioned above, the primary market reflects the secondary market.
Omicron represents a very clear and present danger and we have seen its impact on volatility in the secondary market.
If the concerns about its contagion are true and if it leads to stagnation and business slowdown etc., you will see a correction in the secondary market which will also lead to a slowdown of the primary market.
Equitymaster – What is your opinion on the IPO craze in the Indian startup space and how does it demonstrate the country’s growing startup funding ecosystem? How does it compare to the Telecommunications-Media-Technology (TMT) boom of the late 1990s?
Pranav – There has been a lot of commentary this year around the fact that a higher component of the offering (OFS) or a pure OFS IPO should be viewed negatively. I don’t subscribe to this logic.
I think it’s indicative of a maturing capital markets ecosystem in which early stage risk capital is provided by angel investors, venture capitalists and private equity investors. individual, unlike the 90s and early 2000s, in which these companies used to come to the primary market for this risky capital.
The risk capital provided by these investors fueled the early growth of these companies. As we all know, the early stage of a company is also the most risky and most companies do not survive in this stage.
Stocks that survive and reach a certain level of maturity/stable are those that appear on the primary market, partly also to provide exits for early stage investors.
Providing this exit is very important as it gives back the supply to such investors to redeploy this money in more new companies.
Equitymaster – Today, many IPOs are overvalued. High demand has driven valuations to levels not seen since the dot-com bubble two decades ago. Please share your views on this.
Pranav – I do not subscribe to this overvalued/acceptable comment. What is sky-high valuation?
I could cite countless examples of IPOs from previous IPO cycles (most notably the Avenue Supermarts IPO) where it was said that valuations were very high and investors should stay away. Some of these IPOs have been incredibly profitable.
In my view, if an IPO is registered even once, it means there is already enough demand for it. After all, no one is forcing anyone to buy an IPO! Valuations can only be called ‘sky-high’ if the IPO doesn’t find enough adopters and fails.
We should also keep in mind that it is in the interest of the issuer and the bankers to ensure a successful issue. Therefore, they don’t want to price it in a way that supply doesn’t meet demand.
We should also keep in mind that in India, promoters also continue to hold a substantial amount after the IPO. Thus, their wealth is also related to post-IPO price performance.
Also, on the contrary, when an IPO yields big list-day returns like IRCTC, we say there’s too much money on the table and it’s undervalued.
Equitymaster – What do you think the situation with IPOs will be in 2022? How is the pipeline?
Pranav – The pipeline is very strong. 2021 also breaks all records for the number of companies submitting their DRHPs to the market watchdog for approval.
As many as 115 companies submitted their offers for approval. To put this in context, in 2019 and 2020 there were only 50 records in total.
After a record number of filings, the IPO route continues to stay strong with 35 companies approved by the market regulator with a proposal to raise around Rs 50,000 crore and another 33 awaiting regulatory approval. to raise about Rs 60,000.
Of course, this does not include LIC’s much-anticipated massive IPO, which is expected to launch this financial year.
However, as seen in the past, it doesn’t take too long for the pipe to disappear. For IPOs to continue, the secondary market needs to maintain bullish momentum.
Equitymaster – Any message for IPO-focused investors? Any lessons you’d like to share from past IPO cycles.
Pranav – In my opinion, retail investors should stick with mutual funds. If they have a greater risk appetite, they might consider direct equity.
Only if they have a very high risk appetite should they consider investing in IPOs. IPOs are inherently a riskier asset class. There is information asymmetry and less disclosure in the public domain. Also, there is no real price detection because there are very few sellers compared to the number of buyers. As such, it is a seller’s market.
However, if retail investors want to invest in IPOs, they must be very clear about their strategy and expectations.
In a bull market, they may invest with the expectation of a rally and exit on the day of the listing. Of course, this strategy is quite risky because even in a bull market, not all IPOs yield listing returns.
Another traditional strategy is to do it in the long term after doing research on the company, its management, operations, finance, comparison with peers, etc.
Happy investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is provided from Equitymaster.com)