Venkatraghavan S., Managing Director, Investment Banking, at Equirus, discusses in-depth the reasons behind this year’s unprecedented number of initial public offerings (IPOs), the rationale behind promoters’ decisions to go with an offer-for-sale, the outlook for IPOs in 2024, and a few other primary market-related topics in an interview with Mint. Edited excerpts:
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1. The primary market is booming with back-to-back new issues, while the secondary market is reaching new record levels. Which, in your opinion, has performed better than the other in 2023?
It is unfair to compare the primary market performance in 2023 versus the secondary market performance in the same period given the number of stocks involved. Having said that, a cursory look at the BSE’s IPO Index returns over the last year (~35%) versus the BSE SENSEX returns (~14.25%) would indicate that the primary markets have performed better. However, given the liquidity issues in the newly listed stocks (as in the availability to buy) vis-à-vis the more established stocks, I’d suggest waiting for a year at the least before we pass judgement on the same.
2. For what reason are companies flooding the primary market? What is the exact reason for this year’s record-breaking number of IPOs over the preceding few years?
Any company that looks to raise capital will look to the best and most efficient source, be it debt or equity, while also taking into account funding costs, balance sheet capacity, and valuations. If the public capital markets are providing the equity capital required as per the company’s criteria, then it is purely an issue of supply meeting demand.
The reason behind this year’s record-breaking number of IPOs is simply a function of a) Indian companies performing well; b) the outlook for Indian companies, especially in manufacturing, being exceptional; c) significant liquidity among Indian institutional investors based on SIP and other inflows; d) the availability of foreign portfolio investment (FPI) capital given the happenings around the world; and last but not the least e) the common ground on valuation reached between the issuer and the investors, which makes both sides happy.
3. How do you think the secondary market’s liquidity has been impacted by the back-to-back IPOs in 2023?
There’s obviously some correlation between the secondary and primary markets. However, secondary market liquidity is impacted only in the case of large IPOs, like the LIC one. Even then, it is only temporary, given this day and age of ASBA and listing within T+3 days.
So yes, given the sheer number of IPOs, fund managers will be working extra hard to juggle their portfolios to fund their bids, but I don’t think anyone is complaining.
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4. What are the reasons behind promoters opting for the offer-for-sale (OFS) route, given that the majority of companies in 2023 opted for it?
Issuers typically tend to go public when they require equity capital to be raised for growth, or if they need to provide exit to prior venture capital or private equity investors who have provided the growth capital, or a combination of the two.
In the good old days, public capital market investors were adamant about investing in companies for growth rather than to provide exit or liquidity for PE investors or promoters. However, things have changed, and those investors recognise the role of PE investors in that particular growth stage of the issuer and the necessity for their exit. They also recognise the effort and capital of the promoters that have gone into building a great company and are fine with their attempts to monetise a small portion of their holding.
The reason behind promoters doing OFS is two-fold: 1) to do a reasonably sized IPO so as to attract the best long-term investors; given the nature of allotment in Indian IPOs, small holdings in companies are not worth the effort of monitoring by large investors; and 2) to create a corpus of money for the family, a family office if you will, that can be invested in a diversified fashion so as to initiate the process of wealth creation and management.
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5. The number of SME IPOs has increased dramatically this year. Will this frenzy last into 2024? Could you list some of the reasons why retail investors are drawn to them?
The SME segment is relatively new, and the increase in the number of IPOs in the SME segment is a testament to the constant evolution of the platform, the streamlining of the processes, regulatory reforms, and the increasing comfort that the investor community is drawing from the same. As much as the eligibility criteria being not so stringent, over time the types of companies that are accessing the capital markets through the SME IPOs have become diverse, and the quality has improved, so we see a lot of investor interest in participating in the growth of smaller entrepreneurs. One has seen a significant number of manufacturing companies in the SME segment accessing the capital markets, and given the push to Make in India, this trend should continue.
Retail investors have been drawn to SME IPOs on the back of the improved quality of companies listing on this segment and the seemingly increased risk appetite that we have seen over the past 3 years. Given the smaller market capitalisation, liquidity, the requirement for market making, etc., we tend to see that the SME IPO valuations are more tempered, thereby leaving more on the table for retail investors.
Just as with mainboard IPOs, one would advise caution and detailed analysis for SME IPOs as well, since equity is inherently a risky product.
I expect the SME IPO segment to track the mainboard with regard to the outlook for 2024. There is no reason to believe that the SME IPO segment will behave differently when I expect the overall primary markets to be robust in the coming year.
6. How do you see the IPO market doing in 2024?
Traditionally, we have seen the primary markets take a break six months prior to a general election. However, a combination of events has meant that IPO activity continues to be robust.
The performance of the ruling party at the Centre in the recent state assembly elections—where they have done better than expected or better than the exit polls suggested—and the dovish stance of the US Fed have meant that concerns on account of political or market stability have taken a back seat.
I believe that 2024 will continue to see a great number of IPOs—possibly even better than 2023—given the expectation of GDP growth, the India manufacturing story, and the feeling that the current ruling dispensation will return to power based on the recent state elections’ performance.
For sure, there will be a lull in the couple of months leading to the general elections, where the market could be volatile and investors (both FIIs and domestics) would take a pause and avoid looking at new positions via IPOs, but I believe that would just be a temporary phenomenon.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 26 Dec 2023, 12:14 PM IST