Most IPOs reasonably priced, domestic funds drive a hard bargain: Kaushik

The primary market has witnessed a promising trend across products in the first half of the year. IPOs have performed exceptionally well, with a notable increase in average ticket size, Kaushik said

It is an exciting time to be an investment banker, with robust activity across various financial products, including initial public offerings (IPOs), qualified institutional placements (QIPs), and block deals, says Deepak Kaushik, Group Head of Equity Capital Markets (ECM) at SBI Capital Markets. In an interview with Sundar Sethuraman in Mumbai, Kaushik highlights an interesting trend: not only multinational corporations but even domestic companies are increasingly choosing to list on local exchanges rather than seeking international markets. Edited excerpts.

This has been a stellar year for deal activity. What’s the outlook for the rest of the year?
 

The primary market has witnessed a promising trend across products in the first half of the year. IPOs have performed exceptionally, with a notable increase in the average ticket size from Rs 800 crore in the last financial year to around Rs 1,300 crore in this financial year. It suggests potentially higher average ticket size expected by the year-end. 

This is due to significant private market activity 4-5 years ago, leading to private equity players seeking exits, which has driven the surge in IPOs. However, they may not exit entirely through IPOs, instead opting to offload remaining portions through the secondary market when valuations rise. Promoters also tend to capitalise on these opportunities. The improved valuations have led to an increased activity in IPOs and block deals, indicating a healthy and vibrant market.

The recent market correction has failed to make a dent in activity.
 

A minor correction was overdue after the market's significant run-up, but investor sentiment remains optimistic, viewing corrections as minor setbacks. The market is reasonably priced, except for some excess valuations in the small-cap segment. Notably, the IPO landscape has shifted over the past year. Domestic institutions now play a more significant role in driving valuations, rather than foreign portfolio investors (FPIs). While FPIs still influence big-ticket issues, domestic institutions are more discerning and drive a hard bargain. Investment decisions consider past performance, but valuations are based on future potential and forward earnings estimates. On a forward-earnings basis, IPOs are reasonably priced, and I would say they're in a sweet spot.

What explains the strong response to the recent IPOs and listing day performance?
 

It's a combination of value-seeking and institutional demand. Investors only buy if they perceive value in an issue. Institutional investors often want a larger allocation, but allotment constraints limit their participation. Typically, retail investors sell, while institutions buy on listing day. Institutions won't participate if they believe the issue is overpriced. They see significant upside potential, driving their post-listing purchases. Additionally, record inflows into SIPs and fresh demat accounts indicate robust market liquidity, further supporting this trend.

Going forward, what are the themes that could dominate the IPO market?
 

The financial services sector consistently attracts significant interest due to its ongoing capital requirements. New-age companies, particularly those in the growth phase, must demonstrate a clear path to profitability to garner investor support. Recently, startups and new-age companies listing on the markets have been on the cusp of turning profitable, making them attractive to investors. Market dominance is also crucial, but the market's reaction to the listed stock is even more important. We believe the trend of investing in new-age companies will continue. The renewable energy space has seen considerable interest due to government initiatives. Notably, the infrastructure sector, which has seen few transactions in the last 8-10 years, is now experiencing renewed interest.

The ECM fee pool is encouraging. Can i-bankers expect large bonuses this year?
 

It's an exciting time to be an investment banker. This year is shaping up to be significantly better than previous ones, with overall fees increasing substantially. Companies with financial sponsors seeking exits, one can expect attractive fees, making it a lucrative opportunity. The markets are thriving, with robust activity across various products, including IPOs, QIPs, and block deals.

What has led to the strong build up in IPOs now?
 

Since August last year, we've witnessed significant market traction. Typically, larger-sized issues are executed when markets are stable and favourable. It's essential to test the waters first, and preparations for bigger issues began around that time. The IPO process typically takes 8-9 months to come to fruition. The only concern during this period was regime continuity, but the election outcome provided a boost to the markets, alleviating those concerns.

Do you expect more IPOs from multinational companies after Hyundai?
 

It's not just MNCs; we're also seeing a trend of companies that initially established themselves abroad now shifting their base to India and opting for an India listing instead of listing overseas. This shift is driven by the attractive valuations and traction they're experiencing in the Indian markets, which offer valuation comfort. Additionally, the ease of doing business in India is improving, and the markets have matured over time, making it a more appealing destination for these companies.

Recent listings by new-age companies have performed well. Will it be different this year?
 

Investors have become more mature and cautious, having learned from past experiences. Many are now focused on sectors like electric vehicles, where we've only scratched the surface and break even points are within sight. Some companies have already completed their capital expenditures and are poised to turn profitable once they reach certain thresholds. Moreover, disclosures have become more comprehensive and transparent, thanks to Sebi’s guidelines on key performance indicators and disclosure requirements.