Missing IPOs in a stock rally: When will markets get their mojo back?

The trend of a drop in the listing of stocks is not taking place in India alone, and is a global phenomenon, as investors are grappling with challenges of macro-economic uncertainties. Image: Shutterstock

As companies waiting to go public chase liquidity and stock returns, Indian primary markets seem to still be in the slow lane, even when indices are hitting meteoric highs. Does it indicate a lack of confidence or is it simply a valuation conundrum? Well, the trend of a drop in the listing of stocks is not taking place in India alone, and is a global phenomenon, as investors are grappling with challenges of macro-economic uncertainties.

“First of all, the initial public offering [IPO] market is driven by many factors, including macro-economic trends, investor sentiment and business outlook,” explains Raja Lahiri, partner, Grant Thornton Bharat. Global macro trends continue to be challenging, with growth slowing along with continued evolution and tech disruptions. While Indian macro continues to be robust, with strong domestic demand, Indian companies will also have to deal with slowing growth and recessionary trends in global markets, he adds.

Buoyed by liquidity mostly through institutional investors, Indian markets are roaring with gains, hitting record highs in June. Both the benchmark indices, Sensex and Nifty, had hit record highs previously last December, while they have gained nearly 10 percent from the period starting end of March 2023. Typically, companies opt to raise funds in stock markets through IPO listings when the overall secondary market is rising, and investor confidence is exuberant. However, the dry spell in primary markets seems to be lasting a little longer this time.

For instance, in January to June so far, there have been only nine IPOs, which collectively raised Rs 8,053.64 crore, shows a Forbes India analysis of data provided by Prime Database. In contrast, there were 16 IPOs in first six months of last year, which raised Rs 40,310.61 crore. However, overall stock markets were on a decline in that period, with the Sensex falling nearly 9 percent in January-to-June 2022.

“I don't think the IPO market has dried up at all. Just as in the previous year's last three quarters, there have been select IPOs. And we expect there will be more of the same going forward,” says Venkatraghavan S, managing director, Investment Banking, Equirus. He feels it is not that promoters’ confidence is lagging in fund-raising through the IPO route, it is just a matter of time.

“There's a difference between secondary markets and primary markets, and empirically we've seen primary markets bounce back with a lag to secondary markets. We believe there will be a significant number of IPOs in the coming months. There is no lack of confidence among promoters, but as in any transaction, the seller and buyer will have to find a comfortable middle ground,” he elaborates.

However, as challenges remain regarding finding the right timing for a company’s IPO, the big question is on valuations. Remember what stirred a hornet’s nest when Honasa Consumer, which runs popular personal skincare brand Mamaearth, filed its Draft Red Herring Prospectus (DRHP) to get listed on the stock markets, sometime last December? Ultimately the IPO was put on hold on the speculated valuation concerns. So, what gives? “Valuation is always a tussle. It's not specific to today. There will be conversations to find a middle ground at which time the IPO will happen,” Venkatraghavan adds.



Experts say investors have also grown more vigilant of IPO-bound companies and look for more compelling, convincing and sustainable strategies beyond profitability. “There is sufficient dry powder and investor interest in the market and that’s demonstrated by the strong growth of the Sensex over the last quarter. However, there is investor caution and increased due diligence regarding the quality of companies, especially around business models, profitability etc, and hence the IPO market in 2023 has been slow. This is also in line with global IPO trends, which are witnessing slowdowns as well,” Lahiri adds.

According to him, in terms of valuation, while the Sensex rise is positive, this also raises the conundrum and challenge around IPO pricing.  “IPO prices need to be balanced with expectations of company founders as well as investor appetite. Therefore, valuation does play a role in terms of the launch of an IPO, but, in my view, fundamentals around robustness of the business model as well as good governance standards and readiness of the companies to be listed becomes critical,” he says.

Also read: Upcoming IPO 2023: List of new IPOs filed with SEBI in India

What to watch out for now?

However, it is not all gloom and doom in the primary markets. A significant number of companies are waiting to be listed via IPOs. Currently, there are 42 companies that have received approvals from the Securities and Exchange Board of India (Sebi) to go public. Some of the big issues lined up are EbixCash, with an estimated issue size of Rs 6,000 crore, Tata Play (Rs 2,500 crore) and Navi Technologies (Rs 3,350 crore).

According to Lahiri, there continues to be high interest around IPOs and there is a good line-up of DRHPs, as well as companies preparing for IPOs.  “Listing is a journey and comes with onerous responsibilities and liabilities for the management of the company and board, and hence preparing well for an IPO is key. Private equity [PE] investors also want their portfolio companies to be well prepared before they get listed,” he says.

Some of the listings of 2023 so far are Mankind Pharma with an issue size of Rs 4,326.36 crore, Avalon Technologies (Rs 865 crore), and IKIO Lighting (Rs 606.50 crore).

Buzzing SME IPO segments

There has been brisk fund-raising via SME IPOs in the January-to-June period, even as the main board IPO segment has been slowing down. Since the beginning of January, there were 56 listings in the SME IPO segment, which have collectively raised Rs 1,219.99 crore, according to Prime Database.

This compares to a total 109 SME IPOs in the full year of 2022, which raised Rs 1,874.84 crore. In terms of fund raising, 2018 was the best year for the SME IPO segment, which had 141 listings to raise Rs 2,286.93 crore, the best in at least 10 years.

Venkatraghavan explains why the SME IPO segment is buzzing even when the markets are volatile: “Eligibility criteria is not as stringent. And with smaller issue sizes and market cap, and with market making, there are different constituents of the market that show interest and drive demand.” 

Missing: Startups and new age companies

New age companies seem to be shying away from the IPO segment as investors are not only cautious about their path to profitability, but they are no longer charmed by startups anymore. In FY2023, only Delhivery and Tracxn Technologies belonged to new-age, technology companies, indicating a slowdown in IPOs from this sector. This compares to five new-age, technology companies raising Rs 41,733 crore through IPOs in FY22.

According to Lahiri, startups soon started realising the importance of profitability and how subscribers are overly fixated on a company's fundamentals, and hence opted for several fundraising stages, minimising their expenses which even led to layoffs before signing for IPOs. “As far as new-age companies are concerned, there is enhanced focus on ‘path to profitability’ and strengthening the business model before they tap the IPO market. In my view, it’s a matter of timing, but I believe that quality new-age companies would come to the IPO market this year,” he adds.