Initial Public Offerings (IPOs) play a crucial role in the financial markets. India’s IPO market is a captivating mix of possibilities and uncertainties. Some companies soar like rockets on listing day, while others leave investors scratching their heads. Is it a goldmine or a minefield? This article delves beyond the hype to provide a data-driven analysis of recent trends. We’ll explore the driving force behind the boom, changing sectoral landscape, investor behaviour and much more, get ready to separate fact from fiction of IPO boom and make informed investment decisions.
With India’s economy racing ahead and its start-up ecosystem on fire, companies are queuing up to go public, attracting a swarm of investors eager for a slice of the action. In the recent years the Indian stock market has witnessed significant IPO activity reflecting the country’s economic growth & investors interest.
Driving force behind the boom:
Several factors have fueled this IPO frenzy. Foremost among them is India’s robust economic growth, coupled with favorable demographic trends and increasing consumer spending. Additionally, the government’s initiatives to promote entrepreneurship and ease regulatory hurdles have incentivized companies to go public. Furthermore, the success stories of IPOs in recent years have inspired confidence among both issuers and investors, creating a virtuous cycle of IPO enthusiasm.
Implication for Investors:
Initial Public Offerings (IPOs) present a compelling avenue for investors to participate in a company’s growth journey, but careful consideration is essential. While IPOs offer the potential for substantial returns, they also entail risks, including valuation concerns, market volatility, & regulatory uncertainties.
As such, investors need to conduct rigorous due diligence and analyze company’s fundamentals & adopt prudent investment approach in navigating the IPO market effectively. In addition, staying connected with market trends, industry dynamics, and regulatory development is important for making informed investment decisions in the IPO segment.
Sectoral Focus:
While IPO activity spans across various sectors, certain industries have emerged as focal points of interest and innovation. As a result of the growing demand for tech-enabled products and services, the technology sector has seen a surge in initial public offerings (IPOs), driven by developments in digital infrastructure and changing consumer behavior.
Main Market vs. SME Market: A Tale of Two Stages:
An interesting wrinkle in the IPO story is the contrasting performance of the main stock exchanges (BSE & NSE) and the SME markets. While the main market witnessed a dip in IPO activity in Q2 2023 compared to the same period in 2022, the SME markets have been on a roll. This suggests that smaller companies are finding the IPO route more accessible, possibly due to streamlined regulations for these markets.
Important terms in the IPO:
- Issue price: The price at which shares of the company will be sold to investors before an IPO company begins trading on the public exchange & it’s commonly also called as offer price.
- Lot Size: The minimum number of shares an investor can buy or sell in a single trade on a stock exchange. There may be different lot sizes for different IPOs.
- Listing Gain/Loss: The difference between the issue price and the opening market price of the share on the listing date. A positive difference indicates a listing gain, while a negative difference signifies a listing loss.
- Preliminary Prospectus: A document filed with regulators that provides information about a company’s plans for an IPO, including its financial condition, future prospects, and how it will use the proceeds from the offering.
- Price band: The range within which the final issue price of an IPO can be determined. The company sets the price band in consultation with investment bankers, considering factors like investor demand and the company’s valuation.
Analysis of Mainline IPOs Listed on the Indian Stock Market (2021-2023)
The analysis focuses on the following key metrics:
– The total number of IPO’s listed on the Stock exchange during the period 2021- 2023.
– The IPOs which have provided negative returns over the years.
– The highest listing gain & its price journey over the period of time.
– The lowest listing gain & its price journey over the period of time.
The below table represents the analysis of 161 IPO’s which are listed on stock exchange from the year 2021- 2023.
As the table shows, a significant portion i.e. 43 of the total 161 IPOs during the period (2021-2023) experienced negative returns on their listing day. This highlights a potential risk for investors entering the market at IPO pricing. Out of the total IPOs listed in 2021, 28.13% (18 out of 64) had a negative listing day price whereas, in 2022 a higher percentage (36.84%) of IPOs (14 out of 38) had a negative listing day price, further looking at the percentage of IPOs listed with an issue price more than 20% above the offer price, we see a significant decrease in 2022 compared to 2021. In 2021, half (50%) of the IPOs listed had an issue price more than 20% above the offer price. This dropped to 26.32% in 2022.
The main reason behind the IPO negative listing and significant decrease in IPOs listed with an issue price more than 20% above the offer price during the year 2022, attributed to a confluence of macroeconomic factors:
– Weakened Market Sentiment: The overall stock market experienced a downturn in 2022, with the NIFTY50 index delivering returns of less than 5%, a stark contrast to the robust 24% growth observed in 2021. This broader market weakness inevitably impacted the IPO market, leading to investor caution and a reluctance to participate in new offerings at high valuations.
– Geopolitical Tensions: Global geopolitical tensions, such as the conflict in Ukraine, created a climate of uncertainty that dampened investor appetite for riskier assets like IPOs.
– Inflation and Interest Rate Hikes: Rising inflation concerns in India, coupled with aggressive interest rate hikes implemented by the central bank, further eroded investor confidence. This tightened financial conditions and made it less attractive for investors to allocate capital towards unproven companies entering the public market.
These combined factors effectively led to an under performance in the IPO market during 2022.
Further, the percentage of IPOs listed with a negative listing day price in 2023 is 18.64% compared to 2022 with 36.84% also there was a higher percentage of IPOs listed with an issue price more than 20% above the offer price in 2023 (50.85%).
The Indian stock market in 2023 was a whirlwind for investors. It wasn’t just about numbers, it was a year packed with IPO crazes, even slow-moving stocks like ITC suddenly gained 40%, keeping investors glued to every market move. The Nifty, a key index, soared by +18%. Impressively, smaller companies mid and small-sized ones outshone, boasting returns of +40% and +50% each. Throughout the year, 57 new companies entered the market. Sectors like defense, real estate, automobiles, public sector companies (PSEs), and pharma showcased remarkable performances. However, newer businesses experimenting with innovative ideas had varied success.
What led to this turnaround in 2023?
Three pivotal factors: state elections signaling policy stability, the RBI’s steady performance coupled with a positive GDP forecast, propelled India’s market cap to $4 trillion, solidifying its position as the fifth-largest market globally.
High-Flying IPOs: –
Let’s delve deeper into the analysis of high-performing IPOs listed on the Indian Stock Market between 2021 and 2023. Here, we’ll focus on IPOs that delivered significant gains for investors, specifically those exceeding 20% above their issue price on the listing day.
The following tables illustrate the IPOs with the highest and lowest listing gains:
The below table Indicates that a significant portion of the IPOs listed in 2023 exhibited positive price gains over time as compared to 2021 and 2022. This suggests a generally positive post-listing performance for a majority of the companies in 2023. However, it’s important to note that a smaller number of IPOs in 2023 did experience negative price movements.
Comments:
Equity market inflows can lead to inflated valuations, particularly when listed companies growth doesn’t mirror overall GDP growth. In this context, Initial Public Offerings (IPOs) play a crucial role in channeling these inflows. By facilitating the listing of new companies with growth potential, IPOs ensure that funds are directed towards entities that can contribute to economic value creation.
Investing in IPOs presents both promising opportunities and inherent risks. While IPOs offer the potential for substantial returns, investors must carefully assess the company’s fundamentals, market conditions, and long-term growth prospects before making investment decisions. Ultimately, a balanced approach, informed by careful analysis and prudent risk management, is key to navigating the complexities of IPO investing and achieving sustainable financial success.
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The article is authored by Mr. Saurabh Gosavi and Mr. Mayur Solanki from Team RichVik