IPO activity to see spillover effect from mid, smallcap weakness: Analysts

The ongoing weakness in the broader equity market is likely to weigh on primary market investor participation ahead, which has already begun showing signs of fatigue, analysts said.

The spillover effect, they say, will continue as long as the Midcap and Smallcap segments remain volatile.

“The effect will be felt in the IPO market. The subscription levels have come down in the last few days and recent 4-5 IPOs have not done well. Even in SMEs, the kind of grey market premiums that were being commanded earlier and the eventual listings are not in line,” said Ambareesh Baliga, an independent analyst.

Calendar year 2023 was a tepid year for fundraising via the IPO route as 57 Indian corporates raised Rs 49,434 crore through mainboard offers, 17 per cent lower than the Rs 59,302 crore mobilised by 40 IPOs in 2022, report from PRIME Database suggests.

However, excluding the mega LIC IPO which came out in 2022, IPO mobilisation increased by 28 per cent from last year.

At the start of CY24, 27 companies planned to raise Rs 28,500 crore were holding Sebi approval, while another 36 companies looking to raise about Rs 40,500 crore were awaiting Sebi nod (out of these 63 companies, 3 were NATCs which are looking to raise roughly Rs 16,000 crore).

Overall, so far in calendar year 2024 (as of March 19), 10 of 21 new listings have been subdued despite decent subscription levels, shows data from PRIME Database.

These included IPOs of Epack Durable, Jana Small Finance Bank, Capital Small Finance Bank and Entero Healthcare, which shed 9-11 per cent on their respective listing days. See chart

Weak debut

More recently between March 12 and March 19, five new debutants saw muted to negative listings, which closed with sharper losses despite strong subscriptions.

During these six trading sessions, the BSE SmallCap and MidCap indices had cracked 5 per cent each as market regulator Sebi flagged price manipulation and froth in the two segments. The two BSE indices are now down up to 11 per cent from their record highs made in February.  

Among the recent IPO laggards, JG Chemicals saw robust subscription of 28.5 times, but closed 16 per cent below the issue price on its debut last week. Similarly, RK Swamy crashed 8 per cent on its listing day after a strong subscription of 26 times.

Offers of Gopal Snacks and Popular Vehicles were also oversubscribed last week but the stocks ended up to 10 per cent lower on debut. Bharat Highways InvIT listed flat and gained 3 per cent by closing.

That said, analysts have also flagged the recent RBI scanner on NBFC companies with respect to flouting of norms on IPO and gold financing, which they believe could also tighten flows in the primary market.

Caution likely

As the IPO frenzy moderates amid a broader market meltdown, companies looking to raise money from the primary market could also look at delaying their offers, analysts believe.

Further, the weakness could also get reflected in the pricing and sizing of the IPOs that companies may choose to recalibrate, they say.

“The impact of the current market weakness could be the tactical timing of IPOs, in terms of the actual opening of the issue based on the overall sentiment. The other impact could be around more considered pricing and sizing of the issues,” said Bhavesh Shah, Managing Director, Head Investment Banking, Equirus Capital.

Investors, analysts suggest, bet only on IPOs of fundamentally strong companies, keeping a long-term view as the current market backdrop is unfavourable for making quick profits.

“Bet on good companies from a long term as the game of buying and flipping on listings or selling them within a couple of days is now getting over,” said Baliga.