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Learnings from this year’s IPOs

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Investors who put money into listed equities and Initial Public Offering (IPOs) will remember 2021 fondly—they would have witnessed a 25% increase in the Nifty50 and a 38% return if they had invested in all of the IPO listings, according to data. Corporates raised a record amount of capital in the year (over Rs 1 lakh crore) driven by the need to increase working capital or expand commercial operations. The secondary markets are booming for investors, thanks to optimism about the economy’s recovery following the pandemic and surplus liquidity. As a result, new investors have rushed to create Demat accounts in order to avoid missing out on early listing benefits.

New-age, tech-focussed companies such as Zomato, PolicyBazaar, Paytm, Nykaa—applications that people have used every day—became avenues for investments. With the year drawing to a close, there is more action expected to emerge in the first quarter of 2022 in the form of the much-awaited IPO from Life Insurance Corporation. It will also determine trends for other upcoming IPOs. But this year has thrown up some important learnings, for both corporates and investors, which will sustain into the coming year.

  • Rationalising the price

There have been cases where firms have elected to rationalise the price bands for their issues, presumably because they recognise that investors may be hesitant to invest at higher levels. Following an uncomfortable investor response, India’s largest private health insurer Star Health, backed by billionaire investor Rakesh Jhunjhunwala, reduced the amount of its IPO to Rs 6,400 crore from a planned Rs 7,249 crore earlier this month. The IPO was priced at Rs 900, but it was forced to extend the time for individual investors to purchase after failing to get completely subscribed.

The Star Health stock debuted on December 10th to a lukewarm response from investors, trading at Rs 845 on the NSE, a 6% discount to the issue price. Despite Jhunjhunwala’s presence, the issue and the stock has not been able to garner interest. “Star Health did not show a differentiated business model, health insurance companies have been operating in India for decades. The company was unable to show how it would grow in an existing competitive landscape,” says Sandeep Bhardwaj, CEO (retail broking), at IIFL Securities.

In a relatively shaky market climate, when fears of the spread of the new Omicron virus were mounting, Anand Rathi Wealth, part of the financial services Anand Rathi Group, had an over-subscription of 9.87 times. According to sources, the issue was originally meant to be a Rs 900 crore offering with a greater price band of Rs 800, but it was rationalised and reduced to Rs 660 crore with a smaller price band of Rs 530-550, which made more sense. From 19 anchor investors, the company raised almost Rs 194 crore. The issue will be released in the coming days.

 

  • Making losses? Not a deterrent factor

In prior years, profitability and capital allocation were important factors in how investors perceived companies and their initial public offerings. Investors have been more skeptical of IPOs this year, as seen by the loss-making Zomato. Even as topline growth continued after the second lockup, the online meal delivery platform recorded two-quarters of losses as a public limited company, with losses of Rs 430 crore in the September-ended quarter and Rs 356 crore in the June-ended quarter. “It can have a successful IPO if investors understand whether the company will be relevant, [and] the business exhibits scalability and how it can harness technology”, Bhardwaj noted.

What went against Paytm—whose record IPO of Rs 18,300 crore was oversubscribed just 1.89 times and whose stock collapsed over 20 percent on the opening day of trading—was that investors were not convinced about future growth projections and whether they would materialise. “A company will be seen as average if it has a presence across various segments but is not a market leader anywhere”, a strategist with a PMS advisory firm said, declining to be named. One97 Communications’ (Paytm) stock remains volatile: It touched a low of Rs 1,271 at the BSE before gaining to a high of Rs 1,796 on November 25, before losing ground again to Rs 1,579 on December 10.

  • Right timing is not good enough

Most of the companies that have come to raise capital and list in 2021 have found comfort in the fact that the timing was right. But getting the timing right might not be good enough. The pricing will need to be right. According to data, of all the 53 offerings which came this year, 28 percent (15 out of the 53 offerings) got a negative listing compared to the offer price, despite the general market buoyancy.

  • The LIC factor

From mid-November to early December, the stock markets experienced around two weeks of volatility, with the markets correcting around 7-8 percent as a result of Paytm related fears and mounting Omicron variant instances around the world. Several anticipated IPOs/FPOs, notably Mobikwik, have remained on the sidelines after receiving SEBI approval for their offerings.

Companies may have waited for this small window of investor uncertainty to close, or they may have chosen to wait until after the planned massive LIC IPO, which will be India’s largest-ever offering and is set to take place this fiscal year. The consulting actuary Milliman Advisors, which will establish LIC’s embedded value, is expected to submit its report this month.

Pranav Haldea, Managing Director of Prime Database says: “There must be some companies who would be waiting and not wanting to enter when LIC has crowded the space. But these concerns appear unfounded.” The secondary and primary markets have seen record highs in 2021. “Liquidity is not a concern. If there is a quality offering with a good valuation they will find the money,” Haldea adds. Besides Mobikwik, an eye is on the NSE IPO, which is likely to hit the markets in the calendar year.

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