IPO : Investors Best Friend In 2020
A healthy IPO market is always good for the overall wellbeing of the equity markets. The year 2020 has been one of the most volatile years, almost comparable with the global financial crisis year i.e. 2008. In spite of the crisis that shook investors’ confidence in the first half of the year, the IPO markets showed a solid recovery in the second half, thus reviving investors’ interest in IPOs. Ganesh Vaybase discusses in detail how the IPO markets performed in 2020 while sharing the outlook for the IPO markets in the coming months
A vibrant IPO market is simply great for equity markets not only because it makes investors, both retail and institutional, more active in the markets but also because it throws some mouth-watering, money-making opportunities in the short term. The IPO market in 2020 has surprised investors with its stellar performance. In fact, the IPO activity in India gained momentum as benchmark indices recovered from the pandemic-influenced slump in equity prices at the beginning of the year. The IPO market showed recovery, not only in India but globally too.
Says Paul Go, EY Global IPO Leader: “Although IPO activity declined in April and May of the year 2020 because of the economy lockdown in most markets, we began to see a strong rebound in June. Well-prepared companies, in the right sectors and with sound business models, can successfully adjust during the pandemic, and will find the right window of opportunity amid turbulent capital markets for the rest of 2020.” The impact of the pandemic was seen in equity markets in the first half of 2020. The negative impact on equity prices played a significant role in declining IPO activity in the first half of 2020.
Globally, in Q2 2020 the IPO activity declined when compared to Q2 2019 across all geographies in terms of deal numbers and proceeds. The global IPO activity was seen slowing down in April and May of 2020 with a 48 per cent decrease by volume (97 deals) and a 67 per cent decrease in proceeds when compared to April and May of 2019. Such underperformance dragged down the IPO performance in the first half of 2020. The underperformance was seen despite a late flurry of deals globally in June.
A Grand Return
The recent listing of Rosario Biotech, Chemco Specialty Chemicals, Route Mobile and Happiest Minds were amongst the best IPOs that investors have experienced in over a decade. The stellar listing of these IPOs on the bourses revived investors’ interest in IPOs in 2020. Even though the year 2020 saw stellar listing performances, only eight companies hit the markets in 2020 when compared to 27 in 2016, 38 in 2017, 24 in 2018 and 17 in 2019. However, the best part of the IPOs in 2020 has been the average issue size. The average issue size of the companies that raised money from the markets in 2020 stood at Rs 4,276.95 crore, beating the average issue size of the previous four years.
In spite of the difficult year filled with challenges and lower number of companies raising fresh money, the total amount of money raised in 2020 increased by 49 per cent. Not to forget we still have almost three months left in CY 2020 and several IPOs lined up. The year 2017 saw the highest amount of IPO money raised in the past five years with Rs 75,278.58 crore raised in total. One of the highlights of the 2020 IPOs is the average listing gains which stand at 46.7 per cent. Such impressive listing gains have been the best seen by IPO investors in the last five years. The next best performance seen in the last five years was in 2017. The year 2018 was the least impressive year for IPOs with average listing gains recorded at 7.53 per cent.
Global IPO Performance
Globally, the IPO markets showed a downtick both in terms of number of IPOs as well as total IPO proceeds, except in the Asia Pacific region, led by Shanghai. Across geographies a greater number of companies that hit the markets for fundraising came from sectors such as industrial goods, healthcare and technology. This sectoral dominance was seen across different geographies. As many as 17.7 per cent of the total number of IPOs got listed on Shanghai (main board and STAR market) while US NASDAQ topped the list of stock exchanges in 2020 which saw the highest amount of proceeds raised. In 2019, Hong Kong topped the list on both these counts i.e. maximum number of IPOs listed on the exchange worldwide and also the highest amount of proceeds raised.
The average listing gains for the US market IPOs has been 28.8 per cent in 2020 whereas Indian IPOs in 2020 on an average have posted listing gains of nearly 46 per cent.
Conclusion
The IPOs in 2020 were dominated by technology companies and the healthcare sector. This trend may continue globally in the remaining part of the calendar year. Worldwide, a notable rebound of IPO activity is expected in the remaining part of 2020. In India, however, the picture may not be as rosy for the remaining part of CY 2020. LIC is expected to get listed by March 2021 and speculation is rife that the government will also list it overseas. It may be safe to say at this point of time that we may have seen the best of IPO markets in 2020 by now and the activity may slow down a little bit for the remainder part of the year. With no big bang IPOs slated to hit the markets in 2020 and no major premium seen in the grey market for the recent IPOs such as Angel Broking, the primary markets are clearly in no mood to reward all the companies that are hitting the markets.
Investors must choose IPOs carefully and understand that there is no IPO frenzy going on in the markets right now. Only quality companies with visible growth in the foreseeable future are able to fetch rich premium. An IPO investor must always remember that the newly listed companies do not have a long track record of performance (share price history) and hence are often difficult to analyse and research. Hence, one must avoid getting carried away by the listing gains seen in certain successful IPOs and evaluate each listing on its merit.
There is ample liquidity available in the financial system and looking at the positive momentum getting built up, investors may be willing to pay a premium for equity markets, which will be good for new companies willing to tap the markets to raise capital. For IPO markets the two essential prevailing market conditions should be ample liquidity and positive market sentiment – which is present right now. For any company willing to get listed on the bourses, the current market condition is conducive and hence one can expect good number of companies to hit the IPO markets in the coming quarters. Investors will have several options to choose from. However, cautious optimism while investing in IPOs will be the most essential aspect for profit-making in IPOs in the coming quarters.