Fundraising activity through initial public offerings (IPO) in India, which fell to the lowest in five years in 2019 because of volatile stock markets, liquidity crunch and global macro headwinds, is expected to recover in 2020, dealmakers say.
IPO activity in 2019 saw the lowest fund-raising since 2015, with 16 companies raising around ₹12,365 crore, data from primary market tracker Prime Database and regulatory filings shows. The previous year had seen 24 companies raise ₹30,959 crore through IPOs, data shows.
“On the demand side, the aftermath of IL&FS crisis had a far-reaching impact with investors preferring safe havens of quality listed stocks which had already corrected sharply by the end of CY18. They also became very choosy about the new companies they want to back. So, only IPOs of very high-quality companies which had differentiated business models or sector leaders went through," said Jibi Jacob, head of equity capital markets, Edelweiss Financial Services Ltd.
On the supply side, many potential issuers let their draft IPO documents approval filed with the regulator to lapse due to the uncertainty surrounding general elections and the economy, leading to lower deal activity, added Jacob.
Investment bankers said that the current trend should reverse in 2020 and that the IPO market is expected to see more action.
A revival of the IPO market is essential as it gives investors the chance to invest in new stocks and to diversify their investments. For companies, raising equity capital at a time when there is a liquidity squeeze is critical and a vibrant IPO market provides them an opportunity to raise capital for future growth and pare debt. For private equity and venture capital investors, IPOs have emerged as an attractive route to exit their investments in private companies.
“Overall, we are seeing greenshoots in the economy and earnings and with India’s weightage in global indices increasing, more FII money is coming into India, driving both secondary and primary markets. A stable US-China trade deal coupled with a strong budget with focus on demand stimulation and improvement in government spending and the improving liquidity amongst NBFCs will further drive capital market activity," said Gaurav Sood, co-head of equity capital markets at ICICI Securities.
There is a strong pipeline of companies that have filed or are looking to file their draft IPO documents with Sebi in Q3 of FY20 or early Q4 and will aim to hit the markets in the first half of calendar year 2020, said Sood.
Investment bankers believe that investors are seeking unique themes to invest in, with technology emerging as a space that is expected to see strong demand.
“There is interest for thematic first-of-its-kind stories. Seeing the strong response to IndiaMart and Affle this year and few other technology companies in the last couple of years, we believe this is a sector that will see much more receptivity from public market investors," said Sood.
Some of the technology companies which have evaluated a US listing in the past might be more amenable to look at an India listing with a greater investor overlap between an India and US listing, he added.