The range of businesses on offer for investing through initial public offerings (IPOs) is widening. Yet, data for the last four years shows that the intrinsic nature of IPOs as a high-risk, high-return proposition for listing gains remains
This week, five Indian companies are offering their shares to the public for the first time, and plan to raise around ₹3,700 crore in the process. There’s a gaming platform, a jeweller, a small finance bank, a chemical manufacturer, and an engineering firm. It’s a diverse mix of businesses, each of which has achieved some scale in its respective space. That diverse palette is an emerging narrative in the Indian initial public offerings (IPOs) landscape.
From an investor’s perspective, woven into that narrative is temptation—and ruin—intrinsic to IPOs. This investment vehicle can deliver stupendous returns overnight as the market sets a price for a stock for the first time. By the same reasoning, it can singe badly. Data on IPOs since January 2017 shows that while IPOs have had a good run, there’s an ample expression of both risk and return.
A rising stock market has characterized this four-year period. The benchmark BSE Sensex has soared 90%, despite some periods of volatility. On the BSE, 266 IPOs were listed during this period. On average, two of every three IPOs delivered positive returns on listing. However, in terms of current return, only about one of two companies in this set was still giving positive returns.
Further, the gains were concentrated in a select group of companies. Returns on listing exceeded 20% for only 37 of the 266 IPOs. The median return was just 1.7%—which means half of all the IPOs returned less than that on listing. And, at present, the current median return was (-)1.2%.
The coronavirus pandemic affected the IPO pipeline. As the economy reopened, the flow of IPOs resumed again, albeit at a slower pace. In 2020-21, for the 10-month period till January, 34 IPOs hit the market. This is a drop from 2019-20, which saw 58 IPOs. And 2019-20 was a big drop from 2018-19, which saw 123 IPOs. Yet, by the end of January, the total money raised by IPOs in 2020-21 was within touching distance of 2019-20, and will surpass it.
A separation by size appears to be underway in the IPO market at present. By one definition, the IPO market can be broken into two segments. There’s the main market where the listing bar in terms of size and financial track record is high. Then, there’s the segment for small and medium enterprises (SMEs). Introduced in 2012, the listing bar for this segment is lower.
In the main segment, the size of IPOs is increasing, but the BSE SME segment is going through a lull. Data from the BSE shows that in 2018, around 73% of the IPOs were in the BSE SME segment. In 2020, this dropped to 55%.
In 2020-21, large companies have increased their share of IPOs further. Data from the Securities and Exchange Board of India (SEBI) on equity issues by companies—be it IPOs or follow-on issues by listed companies—show that in 2020-21, more than half the issues had an issue size of above ₹100 crore. In the three years preceding that, this figure was in the range of 26-27%.
SEBI also categorizes equity issues by sector. The sectoral breakup of this consolidated set over the last decade shows a broadening of the company base. We divided this decade into two five-year periods: from 2011-12 to 2015-16 and from 2016-17 to 2020-21. The number of sectors from which companies have raised money has increased from 17 in the first period to 25 in the second period.
The widening is happening in sectors beyond banking and financial services sector, whose share has fallen from 34% to 13%. Sectors showing greater activity include textiles, cement and construction, and engineering, among others. The current financial year, for example, has seen issues from a payments solution firm (SBI Cards and Payment Services), a burger chain (Burger King India) and an IT services company (Happiest Minds Technologies).
A recent news report, citing Credit Suisse research, said that India had about 100 unicorns—companies with a valuation above $1 billion—that were not listed on the stock market.
That’s about thrice as many as is usually reported, and most were set up after 2005. Several of them will make IPOs and deepen the IPO segment. At their heart though, IPOs remain a high risk, high return prospect.