Initial public offering is gaining momentum in India now that August is one of the busiest months for new listings in nearly a year. As many as 20 companies have already raised over ₹21,000 crore through first public offerings during the month, showing a more confident attitude towards India’s main market.
The strong fundraising activity has also brought the spotlight on the huge IPO pipeline waiting to enter the market and we expect there to be more of that in September.
Recovering in the stock market comes at a time when companies are looking for venture capital to raise capital, bring out fresh shareholders and shore up their balance sheets. Strong investor participation in recent offerings has driven more companies to sell shares and with the market conditions in place businesses can get very good valuations from public investors.
August’s fundraising figure is particularly interesting because it is more active than in previous months. 20 companies are on the market and raising more than ₹21,000 crore since then. As one of the largest IPO calendars in India, there is a lot of activity in different areas and business models and many companies in the market are looking to get capital.
According to the investor base of India, one of the major reasons for the revived IPO momentum is the depth of the investor base. It is the deepened investor base of India which is the source of the strong demand for new listings with retail and institutional interest as well as a growing awareness of equity investment. Digital investment platforms have made it easier for individual investors to invest in public offerings and thus the primary market is expanding.
And there is a huge pipeline of potential IPOs waiting to be taken in the wings. Companies with a combined estimated fundraising need of around ₹4.93 lakh crore are waiting in the wings, but not every company in the pipeline will be able to go on and IPO immediately. This number shows the size of the market potential and there is strong industry appetite to raise public capital.
Companies in the pipeline are diverse and vary from financial services and consumer to technology, manufacturing, health care and other sectors. An investor can benefit from a variety of companies and investment themes in the pipeline and an investor might be more interested in those. But the prospects of each IPO will be very different as per the valuation of the company, profitability, growth expectations, competitive situation and sentiment of the market.
The prospect of a very active September is therefore generating a lot of attention. If market conditions are good, companies that have already received regulatory approval for their projects may be able to accelerate their fundraising plans. A sustained strong demand might also encourage issuers to bring their products to market rather than wait for a later window in time.
A very large IPO pipeline does not necessarily mean that there are even more launches. Companies look for multiple reasons before issuing an IPO; market valuations, investor interest rates and economic situation, and performance of recently listed stocks in the market can play a role. And volatility in the secondary market can also affect the timing of IPOs.
The return of IPO activities is a prospect of opportunity and downside for investors. With new listings, companies can be exposed to companies at a very important stage in their growth process but an IPO is not a good investment just because you can get a lot of attention (and so many people are interested in you) just because it is so popular. Investors should look in the company’s financial situation, business model, debt, competitive position, management quality and valuation before taking any investment decisions.
The performance of recent IPOs can also influence the market for upcoming IPOs. When IPOs are strong post-listing, the market for new issues will be a very positive one and investors will get more involved in the process. When companies are not performing well, investors will be more selective and expect companies to reconsider pricing expectations from the market for new issues.
Another important factor is the distinction between primary and secondary components of an IPO. When a company issues new shares, the proceeds generally go to the company and can be used for expansion, debt reduction, working capital or other corporate purposes. In an offer for sale, existing shareholders sell their holdings and receive the proceeds. This structure is important because it will tell investors how much capital will actually enter the company’s balance sheet.
The revival of IPO activity is a sign of the overall health of India’s capital markets. For companies with a strong growth horizon, expanding consumption base and increasing formalisation, the opportunities to list in public are excellent at this stage. For entrepreneurs and early investors, an IPO can provide liquidity while for companies, listing could also increase visibility and even access to future capital.
August's impressive performance can be viewed as a larger revival, rather than an isolated event. If the ₹4.93 lakh crore pipeline is sustained with a steady stream of offerings, India could see sustained primary-market activity in the months ahead. September is a potentially key month if companies start to issue their issues around the same time.
Investors should however be wary of assuming that every IPO will become a good listing event in the future. Market conditions change rapidly and high subscription numbers do not necessarily guarantee long-term success. Investors should look at the basics and valuation and not just the market reaction or the listing hopes just down the road.
A large number of IPOs to come together could also create more choices for investors, but would also spread out available capital over several offerings. So companies will need to differentiate themselves with attractive valuations, a good growth story and credible business strategy to attract investors.
The next weeks will show whether September can surpass August's big fundraising activity. Much will depend on regulatory approval, issuer decisions, market sentiments and stock performance. If the momentum continues with the market momentum we are seeing now we may see that the primary market in India is still one of the most closely watched sectors of the country’s economy.
For now, August has shown that appetite for Indian IPOs is strong. With 20 companies raising more than ₹21,000 crore and a potential ₹4.93 lakh crore IPO pipeline waiting in the wings, the country’s IPO story appears far from over. The big question for investors and market observers is if September could take this revival to the next level.
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