What is driving IPO rush in Indian equity market?

The Indian equity market is witnessing a tidal wave of initial public offerings (IPOs), with companies eager to ride the crest of investor optimism and a robust economy. The third quarter of the financial year 2023 alone has seen over 34 mainboard IPOs, excluding smaller SME listings, according to data released by EY Global IPO Trends Report (Q3 2023). This surge is fuelled by a blend of tech behemoths, established giants, and promising start-ups.

The Indian stock market is witnessing a frenzy, not of excited retail investors, but of companies clamouring to cash in on investor optimism. Buoyed by the optimistic sentiment and a robust short-term outlook, corporates, promoters, and private equity players are trying to take the opportunity in their favour by making the companies public, according to market experts. The rush to the public stage isn’t just about raising capital but also about high valuations driven by positive sentiment, leaving everyone from seasoned industrialists to nimble-footed PE giants swooning.

“The high valuations in the markets entice promoters and early investors to encash the value of their holdings - fully or partly. Investors, on the other hand, are encouraged by the recent track record of IPOS, which has listed at a good premium to the issue price. Companies find this time an opportunity to raise funds even if they do not need them in the near future,” said Deepak Jasani, Head of Retail Research- HDFC Securities.

“Corporates, promoters and PE players are taking advantage of buoyant market sentiments and healthy short to medium-term equity market outlook to mobilise equity capital from the public,” said Sunny Agrawal, Head of Fundamental Equity Research, SBI Securities Ltd.

Another likely reason could be the peaking of inflation and interest rates in the US economy along with three rate cuts to the tune of 75 bps likely in 2024, according to Agrawal. This will lead to global funds moving out of safe havens like US bonds and chasing riskier assets like commodities.

A similar trend was seen in fiscal year 2021-22, when around 76 IPOs were launched, collectively raising nearly ₹1.3 lakh crore, according to Atul Parakh, CEO of Bigul. “As of December 1, 2023, the momentum continues with 77 companies lined up for their IPOs. Of these, 29 have already received clearance from regulatory bodies, while others are progressing through the approval process.”

As Livemint earlier reported, experts expect a market rally ahead of the general elections in 2024, and it is natural for the market to serve favourable conditions for companies listing. “IPO markets, historically, have had phases to much higher activity. But those phases tend to ebb out closer to general elections. To that extent, the timing of the current hyperactivity is an anomaly,” said Yatin Singh, Head of Investment Banking at Emkay Global Financial Services.

However, instances like these have occurred frequently in the past, resulting in financial losses for investors who acquired assets at valuations deemed unreasonable, warned Aditya Sesh, Founder and Managing Director of Basiz Fund Service Private Limited.

Hemant Sood, Founder of Findoc, explained that the current bullish sentiment and elevated stock prices in the market created an optimal environment for companies to go public. Businesses are strategically leveraging these favourable valuation trends to raise capital through IPOs, capitalising on robust market conditions.

Several recent IPOs exemplify this surge:

• Tata Technologies Limited: In November 2023, this IPO saw a listing day gain of 162.85%, with an offer price of ₹500 and a closing price of ₹1314.25.
• IdeaForge Technology Limited: Launched in July 2023, it registered a listing day gain of 92.78%, from an offer price of ₹672 to ₹1295.5.
• Utkarsh Small Finance Bank Limited: In July 2023, this IPO achieved a gain of 91.76%, opening at ₹25 and closing at ₹47.94.
• Indian Renewable Energy Development Agency Ltd: With a listing day gain of 87.47% in November 2023, it opened at ₹32 and closed at ₹59.99.

How will market volatility impact the IPO market?

Benchmark stocks’ market saw a sharp turnaround in the December 20 trading session, with the S&P BSE Sensex and NSE Nifty 50 witnessing a bloodbath. The reason for the sharp decline could have been attributed to a resurgence in COVID-19 cases in India, the US, the UK and other places in Asia. According to Agrawal, this is a slight jerk in the IPO market. 

“Till the time market corrects significantly and breaches key support levels, sentiments are not likely to hurt. With a significant liquidity cushion available in the market, good businesses with healthy growth prospects can continue to mobilise the funds through the IPO route. Only businesses which are loss-making with low-profit visibility may postpone the launch of an IPO, in case of significant deterioration in the market sentiments,” he observed.