IPOs: Market Rally Required To Boost The Numbers In 2018

 

Listing gains have vanished in CY18 so far. Nikita Singh finds out what is happening in the Primary markets in India and what can one expect from the IPO markets in coming quarters.

Initial public offers (IPOs) have gained immense popularity in the recent years, notching up to a record high amount in financial year 2018. Particularly, IPOs in the Indian markets witnessed a large number of listings and overwhelming enthusiasm amongst the investors. FY18 witnessed the highest fund raising , with companies raising Rs82,109 crore through 45 IPOs in FY18 as compared to Rs28,225 crore in FY17. Along with the mainstream IPOs, the SME IPOs joined the momentum too. The number of SMEs raising funds through IPOs increased from 80 in FY17 to 155 in FY18. Moreover, the total funds raised through the SME IPOs increased by 172 per cent to Rs2,247 crore. 

While the top listing in the Indian markets still date back to the year 2010 with Coal India boasting of an issue size worth Rs15,000 crore, the big IPOs of FY2018 including General Insurance Corporation and The New India Assurance Corporation have charted up to an issue size of Rs11,372 crore and Rs9,600 crore, respectively. Among other top IPOs of all time, Reliance Power Limited, which was listed in 2008, recorded an issue size of Rs11,700 crore and ONGC (FPO) listed in 2004 recorded an issue size of Rs10,534 crore. 

Following the drastic fall in the IPOs post 2008, the listings have gradually accelerated, majorly finding its momentum from 2015 onwards. Despite the high expectations from listings in 2018, the companies that have debuted in the stock market so far during the year have not been able to surpass the top issue size of 2016 such as Rs6,056.79 crore of ICICI Prudential Life Insurance and are lagging behind the top IPOs of 2017. Among the top companies making their debut in 2018, Bandhan Bank posted an issue size of Rs4,473.02 crore, Hindustan Aeronautics with issue size of Rs4,144.06 crore and ICICI Securities with an issue size of Rs4,016.97 crore. While IPOs in the calender year 2018 bring high hopes, the best of these are yet to be unveiled. 

An exemplary year for IPOs, 2017 witnessed the listing of 38 companies, the highest ever after the roll-out of 90 IPOs in the year 2007. The listings raised an amount worth Rs70,255 crore and recorded an average listing day gains of 22.34 per cent with an average issue size of Rs1848.80 crore. Not placed much behind, 2018 is expected to surpass the amounts raised in 2017 through IPOs. The Indian markets have already recorded listings of over 14 companies in 2018, with an average listing day gains of 8.8 per cent and an average issue size of Rs1376 crore. However, the listing day gains in 2018 have been quite insipid when compared to the towering gains of 28.76 per cent in 2014 and 33.57 per cent in 2007. 

Heavy subscription of IPOs: 

From a total 38 IPOs in 2017, 17 IPOs caught investors attention, recording over 10 per cent returns on the day of listing. The non-institutional bidders (NII) category specifically witnessed heavy oversubscription in FY18 with Apollo Micro being oversubscribed by 958 times, Capacite Infraprojects (638 times), Amber Enterprises (519 times), Astron Paper (397 times) and MAS Financial (379 times). Among others, about eight IPOs recorded oversubscription by three times and the remaining 14 IPOs got oversubscribed by one to three times. Furthermore, the primary markets have attracted about 42.6 per cent of March 2018 inflows from the FIIs, largely raising the IPO valuations. 

"Despite geopolitical uncertainties and market volatility, IPO has performed good in the first quarter of the year and is expected to grow in this remaining quarter too. Until the June quarter, the market is expected to be extremely solid. The market/IPO viewpoint keeps on being solid and hearty for the following two quarters, if not the whole year."
-Ritesh Ashar Chief Stratergy Officer, KFIS

PSU listings: 

The recent IPO listings of the PSUs have recorded a lukewarm response, with Hindustan Aeronautics IPO posting a subscription of 0.99 times and LIC subscribing to 140 per cent of the QIB portion, constituting 69 per cent of the IPO size. Following the streak of PSU IPOs in FY18 with the listing of New India Assurance, General Insurance Corp, HAL, Bharat Dynamics, Cochin Shipyard and Hudco, cumulatively raising about Rs24,000 crore; FY19 also has a string of PSU IPOs in the pipeline, including rail PSUs RiITES, IRFC, IRCON and RVNL. Although the much-awaited IPO of IRCTC has been shelved indefinitely, the other PSU IPOs to be rolled out during this fiscal include the merged insurance entity of National Insurance, Oriental Insurance and United India Insurance, and IPOs of shipbuilding companies including Mazagon Shipbuilders, Garden Reach Shipbuilders Dock & Engineers. 

Pre-election boom: 

Considering the companies lined up to launch IPOs in 2018, the year is likely to witness a surge of 34 per cent in the total valuation of IPOs as compared to the capital raised in 2017, even in case of lesser number of listings.

Although the political atmosphere in the country has been searing and looks uncertain, 2018 is expected to do well on an average, following the trend of being a lucrative market before the advent of major elections. Historically, the stock markets have witnessed over 24 per cent higher returns in the year before the major elections, up to the election month.

While the returns are yet to materialise in the Indian stock markets, the markets are absorbing the political developments with high volatility. Nearing the general elections of 2019, each political move strengthening the certainty or uncertainty revolving around NDAs win will shape the mood and the sentiments of the stock markets, including the IPOs. However, the deals in the pipeline ensure a buzzing year for the primary markets. 

Investors changing approach towards OFS 

More matured in approach, the Indian stock markets are moving towards a new dynamic with lower resistance to secondary offerings--share issues without raising fresh money. Investors are investigating into the quality of stocks and growth prospects of the companies, irrespective of the offering being primary or secondary. The markets have also become more accommodating of exit of early investors post IPOs, unlike in the past, when the exit of early investors was viewed as a sign of caution. 

In FY18, PE/VC investors sold off stakes in 17 IPOs with the offer for sale worth Rs10,831 crore, representing about 13 per cent of the total funds raised through IPOs. Meanwhile, the offer for sale by promoters during the period constituted Rs52,340 crore, accounting for 64 per cent of funds raised through IPOs.

With the opening up of this avenue to several erstwhile conservative investors, liquidity in the markets has increased to the extent that even mutual funds are willing to subscribe to IPOs of companies with high valuations, in order to acquire quality stocks.

Tech IPOs: 

Over the years, despite a flourishing start-up atmosphere, more Indian start-ups have exited through mergers and acquisitions than opting for the IPO route. In 2016, about 180 start-ups resorted to mergers as against four choosing the IPO route. Following the same trend, about 101 start-ups exited and only 10 chose to get listed.

Despite IPOs providing benefits of running the company independently and a strong long term valuation from listing the business outside, Indian start-ups have been slothful in entering the IPO markets. Some of the major hindrances keeping the start-ups away from the IPO markets include extensive paperwork, disclosure requirements, excessive compliance needs and extreme scrutiny from institutions. Moreover, the alternate route of acquiring funds through angel investors, PEs and VCs, who bestow high confidence in start-ups, come off as less arduous and slow. 

The financial year 2018 recorded a tremendous increase in the initial public offerings across the globe. The first quarter of the FY18 raised funds worth USD 42.8 billion from 287 deals, posting a 28 per cent hike in the amount raised during the period, despite a 27 per cent drop in the deals made, according to EY’s Global IPO Trend report.

Reasons for heightened interest: 

The increased buzz around IPOs in the recent times has stemmed from the rally in the stocks in the past year, the ease of opening a demat or broking account and the convenient access to data. With lucrative gains showing up on the very listing day, IPOs created significant interest even among the first-time investors in FY18. 

However, while entering FY19, listing gains have rather dampened, bringing disappointment to the retail investors and HNIs. On the back of a subdued and volatile market, the recent stock market debutants have recorded poor listing gains, recovering better returns on a later date. Of late, big IPOs such as ICICI Securities, the largest broking company in India, have recorded tepid interest among investors. Bruising investor sentiments, IPOs such as Bharat Dynamics have listed at a 15.89 per cent discount, HG Infra got listed without any gains and Aster DM Healthcare with 4.16 per cent discount. About two companies out of every five IPOs launched in FY18 are presently trading below their issue price. 

Adding to the shortcomings, most of the funds raised through IPOs are being used to pay-off debts rather than for adding fresh capacities, thus minimising the impact of the fund raised for real growth of the companies. 

In view of the varied domestic and global markets uncertainties, while the markets are likely to remain volatile in FY19, the IPO deal sizes are likely to get larger. The IPO markets are also expected to retain the gains of a bolstered domestic capital inflow.