IPO mania is the new normal but the real test remains value creation

This has been an excellent year for the primary market. By this time of the year (early December), initial public offerings (IPOs) are estimated to have raised ₹1.77 trillion (roughly $20 billion), marginally higher than last year’s figure. Many IPOs have got oversubscription, and there’s every chance that the final figure for the year will be significantly higher than last year’s. Indeed, by December 16, five more IPOs are scheduled to close, including the ICICI Prudential Asset Management mega issue. One trend worth noting is an increasing component of offer for sale (OFS), which constitutes around 60 per cent of all raisings so far. This indicates some promoters and many early-stage investors such as private-equity players and venture-capital firms are seeking to cash out. 

This is part and parcel of a market where many startups seek listing, which in itself is not an unhealthy trend. Around 13 startups have listed this year. The list includes BlueStone, Lenskart, DevX, Indiqube Spaces, Smartworks, Groww, Physics Wallah, Zappfresh, and Urban Company. Another 20 startups with private-market valuations running into hundreds of millions of dollars are reported to be looking to list. Several are unicorns and some are said to be hoping to raise over $1 billion each. A significant proportion of OFS proceeds are flipped into supporting new startups, and thus encouraging entrepreneurship. However, a high OFS component does mean less of the cash raised in IPOs is invested in the companies concerned. Also, while IPOs are doing all right, fundraising through qualified institutional placement (QIP) has dropped considerably.

 

A significantly higher percentage of the cash raised by companies is being invested in new projects, plants, machinery, and physical infrastructure. According to one report, around 20 per cent of the cash (ex-OFS) raised in IPOs was earmarked for investment in physical assets, and that’s far more than the 8 per cent invested in such assets in the previous year. This could signal the green shoots of a long-awaited revival in corporate investment. A substantial portion of the funds has gone into deleveraging such as paying down debt and shoring up working-capital needs. However, one apparent anomaly has been the attitude of foreign portfolio investors (FPIs). They have sold stocks worth over $17 billion this year, but they have been participating in IPOs. This could indicate that FPIs have not lost faith in India as a long-term investment destination but are cautious about the short-term outlook.

 

Despite heavy FPI selling, major indices like the Nifty 50 have hit recent all-time highs. So the apparent correlation between a bullish secondary market and strong primary market has not broken. Domestic institutions, mutual funds, and retail investors have absorbed all the FPI selling and bought enough to push indices higher. But it may also be noted that index returns are considerably lower in forex-denominated terms owing to the rupee’s weakness, and that in itself could have triggered some FPI selling. Expectedly, FPI selling also puts pressure on the rupee, and this may lead to negative feedback loops wherein the rupee weakens, FPIs sell, and the rupee weakens further. Notably, around half the IPOs listed this year are trading below issue prices, which implies that primary-market investors have not made a great deal of money. Nonetheless, primary-market activity is slated to remain strong. It is being argued that this level of activity is now the new normal. The increased availability of risk capital should push entrepreneurship, investment, and growth.