What is causing the current boom in Initial Public Offerings (IPOs)?

Indian has seen over $10 billion raised through IPOs in the calendar years 2016 and 2017. However, 2018 has been relatively more tepid due to the market conditions. To be fair, this is nowhere close to the boom in IPOs that we saw in the early 1990s or the tech IPOs in 2000 or even the plethora of IPOs we saw in 2007. It would be better to say that the IPO market has been buoyant over the last couple of years although it has not been equally buoyant in 2018. Let us first look at the key reasons why IPOs have been buoyant in the previous two years.

Why have IPO markets been buoyant in the last two years?

While 2017 may have been one of the best years in terms of the total amount collected through IPOs, it is nowhere close to the previous IPO booms that we have seen in the Indian markets. There were 7 key reasons for the buoyancy in the IPO markets in the last two years.

  • IPOs returned as an asset class after a gap of almost 5 years and the rapid rise in the Nifty and Sensex to new highs also helped the cause. Market conditions do matter ant that has been supportive since 2014.
  • There was a spurt in retail savings and investments and a preference for equities. If you just look at the total AUM of equity funds it is close to Rs.8 trillion, a substantial jump since 2013. Equity SIPs are collecting nearly $1 billion each month and that is a lot.
  • A lot of quality companies hit the market in the initial phase of the IPO revival. We have companies like Alkem, Indigo Aviation, Café Coffee Day, D-Mart, Shankara Building Products etc. These were quality companies with proven business models and that contributed to public confidence.
  • Post listing performance has been another key factor. Normally, investors lose interest in IPOs when pricing is too aggressive and post listing performance is tepid. The early IPOs were priced more reasonably priced and they also showed performance post listing. That gave ample opportunities for exit and that reinforced faith.
  • The India story had also received a boost with some major reforms measures like GST implementation, demonetization and RERA implemented in the last few years. All these added to the confidence of investors in the India growth story.
  • A stable currency was a key factor that induced institutional investors like the FPIs to participate heavily in the IPOs. It can be seen that with the rupee turning volatile in the last 8 months, the interest of FPIs in primary and secondary markets is also dwindling.
  • A very robust IPO process has ensured that funds don’t get tied up for too long. Key changes like greater allocation spread for retail investors, introduction of ASBA, compression of time to allotment (now just 3 days) have all been instrumental in improving the confidence levels of investors in the IPO markets.

Why IPOs are not yet in boom territory?

Is 2017-18 again a case of IPO market stretching the limits of the capital markets? Actually, this time it is different because we are nowhere akin to the kind of frenzy in IPOs we saw on previous occasions like 1992, 1999, 2007 etc. Hence the fears of an IPO bull market imploding is largely overdone and not really a concern. At best we have seen a pick-up in IPO activity. A total IPO fund raising of $10 billion in 2 years is hardly anything considering that India has a GDP of $2.65 trillion. There are 4 reasons why the Indian IPO market may still not be in boom territory this time around:

  • There is still a huge wall of liquidity that is ready to invest in quality paper. FPIs have withdrawn nearly $12 billion in the current calendar year and that money is just in the sidelines waiting for the rupee and equity valuations to taper a wee bit. Above all, domestic funds are a real formidable force this time around.
  • Back in 2000 and 2007 it was very simple to come out with an IPO. You just needed to change the name of the company to incorporate “Tech” or “Infra” respectively and it was unlikely to be oversubscribed. This time around there was no such blind mania. The stocks that have done well are genuinely good companies with sound business models.
  • In the past, IPO markets have been part of the secondary market bubble. This time around there is really no bubble in the secondary markets. Valuations may be looking 2-3 years ahead but that is a different matter altogether. Hence the risk of IPO market implosion is much lesser and it may be more of a lull before the interest comes back.
  • Fundamentally, there is a big shift towards equities which is being driven by the TINA (There is no alternative) factor. Retail investors are likely to pump in nearly $85 billion into Indian equities every 3 years. That means, IPOs are likely to play a central role. As of now it may be too early to worry about a boom and an implosion!

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