Retail Investors Friend : IPO

Retail Investors Friend : IPO

What the Zomato IPO has done is that it has added fuel to the fire when it comes to retail participation in India markets. This IPO frenzy is one of the best, if not the best, in the history of the Indian markets when it comes to the amount of money being raised from the public. Yogesh Supekar compares the 2021 IPO performance with some of the previous years’ performances while also highlighting some of the most promising IPOs awaited in 2021


If it is the monsoon season, surely it must be raining. But that apart, there’s a downpour of another kind – that of the IPOs in the Indian markets. It could be a global phenomenon where record money is being raised on NASDAQ and other stock exchanges; however, the frenzy in IPO markets in India this time around is unique in the sense that it highlights the emergence of internet companies and start-ups successfully listing with eye-popping market capitalisation. Who would have imaged that Zomato would one day get listed and that too with a market capitalisation of more than Rs 1,00,000 crore!

For many this is unbelievable as the amount of wealth being created by this start-up is humongous and leaves behind several established companies in terms of market capitalisation. For instance, the market capitalisation of Zomato is higher than that of Hero Motors Company! With the kind of free float Zomato enjoys, it could easily be a part of Nifty 50 and may enjoy passive money flow in the form of ETF from overseas. Such success stories are worth mentioning and remembering as it shows that the Indian markets in general are getting matured and have enough space to accommodate start-up listings.

Zomata could only be the precursor since now the market is already gearing up for 2-3 more such technology-oriented companies i.e. start-ups that could get listed on the bourses and even better, be a part of the Nifty 50 index or BSE Sensex once listed. Some say it is euphoria and the valuations are unsustainable while some of the market participants believe that a different mindset is required to invest in internet companies and the traditional valuation metrics may not apply. All said and done, the Zomato IPO has revived the interest in IPOs for the whole nation and the successful listing will go a long way in building the confidence of investors in the primary markets.

Commenting on this recent phenomenon, Rohini Sharma, an IPO investor, says, “I have been participating in IPOs for over a decade now. I have been lucky to get allotment in most of the IPOs I have applied for. As regards the truly attractive IPOs where I have confidence and are hugely oversubscribed, I buy such stocks even after listing if I do not get the allotment. What is interesting about the IPOs this season is the strike rate of the IPOs. Most IPOs have opened with decent gains and definitely above average returns have been delivered. I cannot wait for the forthcoming IPOs as I know extremely high-quality companies are going to hit the markets soon.”

Indeed, some of the top-quality companies are expected to hit the Indian markets and the investors are not only going to be entertained to the core but the implication is that there is an unprecedented opportunity for IPO investors waiting on the backburner for the coming months in 2021. Before having a look at the forthcoming IPOs, here’s a peep into how the IPOs have performed. Before we understand which IPOs have delivered stellar performances, it is worth taking note of the extraordinary performance of the BSE IPO index which has consistently been outperforming the BSE Sensex across various timeframes. The table below puts into perspective the outperformance of the BSE IPO index over the BSE Sensex.

Looking at the BSE IPO index, the key learning for most of the investors is that it is taking exposure in quality IPO stocks even after the stellar listing gains are realised. Several newly listed IPO companies that have seen heavy subscription are seen outperforming the markets post the listing. When we look at all the IPOs’ performance in 2021 alone, we find that the average listing gains have been impressive at 22.49 per cent. Compared to this, the average listing day gains in 2020 have been a little over 42 per cent. The table below highlights the average listing gains in the past five years. The listing gains for H1 2021 have been higher than the average listing gains for 2019, 2018 and 2017 as well. If we accommodate the performance of the IPOs in the month of July up to July 26, we find that the average listing gains have been 28 per cent in 2021 so far. Where the IPOs of 2021 stand out is the size of the IPOs. The table below highlights the average size of the IPOs in the past few years.

Clearly enough, 2021 is one year where the average IPO size is on the higher side. In H1 2021 itself we have seen more amount of money being raised than in the entire period of 2020 and 2019 combined. The figures are expected to rise by a good amount as several top-quality, big-sized IPOs are lined up for 2021. As the number of IPOs is more and the average ticket size is on the higher side, the IPO market in 2021 is certainly in its prime. The healthy pipeline of IPOs is only going to make the 2021 IPO market shine further.

Global IPO Trends The month of July saw several IPOs hitting the US’ markets while a record was set in the Indian markets with the most amount of money being raised in any single month in the history of at least two decades. The table below explains both how the number of companies hitting the markets and the amount raised by the new companies increased in the first half of 2021 when compared to the first half of 2020.

We can see that there is a huge jump in both the number of companies hitting the markets and also the amount of money being raised by the newly listed companies. One must not ignore the fact that H1 2020 was marred by the pandemic scare and the negative sentiment has impacted the IPO markets as seriously as it impacted the secondary market. What is interesting to note is the fact that the EMEIA which stands for Europe, Middle East, India and Africa has shown maximum growth in both the number of companies hitting the markets and the amount being raised in H1 2021.

Another important observation we can derive from the trends in global IPOs is that very few or none of the finance companies were seen raising capital in the primary markets across important geographies when it comes to capital markets. Consumer staple companies have also been absent in raising equity in 2021 so far. In what can be termed as a continuation in trend, we find that the technology and healthcare companies dominated the companies that raised money in 2021 so far across geographies.

Need for Caution

The IPO frenzy is fine and the outstanding IPO performance is great but there is a reason why investors have to be cautious at this juncture. Historically speaking, any euphoria in the IPO markets has mostly been followed by either market underperformance or correction.

The data in the table above suggests that both the amount raised and the number of companies raising money in the markets increased in 2007, 2010 and 2017. What is interesting is to check the performance of the Sensex in the following years i.e. the year immediately after the primary markets were active more than the averages suggest. After the IPO frenzy in 2007, we saw a GFC-led market crash which essentially sucked liquidity out of the system. When the market started to recover in 2010, more companies hit the market, only to utilise the money that could have been invested in the secondary markets. The markets tanked in 2011 by 25 per cent.

Again, after a lull in the IPO markets for a period of five years from 2012 to 2016, we saw more companies raising capital from the primary markets and history repeated itself when the BSE Sensex corrected by 6 per cent. The observation is that the IPO frenzy years are followed by market underperformance and hence one should remain cautious. The table below presents data only for the first half of 2021 and hence it could be a record year for the IPO markets in the history of the Indian markets in terms of the amount of money being raised in a single year.

What comes after such a record year for the primary markets is something that one needs to be cautious about. Also, whenever euphoria is seen in the primary markets, we have had instances where the merchant bankers assist promoters to launch IPOs either at a premium valuation or at times poor quality companies are also listed on the bourses, taking advantage of the investors’ excitement. Hence, investors should not throw caution to the winds even if the year 2021 so far has been perfect for IPO investors.

With the interest in IPOs on the rise, you may want to know what exciting IPOs are expected in the coming months of this year. Here are a few of them: Aadhar Housing Finance Limited’s IPO size would be of Rs 7,300 crore. It is the largest affordable housing finance company in India in terms of its FY 2020 AUM of Rs 1,14,316.6 million as of March 31, 2020 as per CRISIL. Up to 64.83 per cent and 35.17 per cent of their gross AUM comprised loans to salaried customers and to self-employed customers, respectively.

In terms of assets quality ratio as on March 31, 2020, gross NPAs as a percentage of gross retail AUM were 0.82 per cent and net retail NPAs as a percentage of retail AUM were 0.60 per cent. Provisions for retail NPAs – ECL provision for Stage 3 – as of March 31, 2020 was at 27.19 per cent. Another IPO in the pipeline is that of Paytm. In 2009, the company launched the first digital mobile payment platform, Paytm App, to offer cashless payment services to customers and now it has become India’s largest payment platform and the most valuable payment brand with a total brand value of USD 6.3 billion as per Kantar Brandz India 2020 report. Also, expect LIC’s IPO size to be of Rs 70,000 crore

-Bonanza Portfolio

Conclusion

A healthy primary market or IPO market is a sign of prospering capital markets. As more and more companies list on the bourses and are able to raise money from the public, the collective capital is then put to use to more productive purpose and indirectly leads to GDP growth in the country. What a vibrant IPO market does is that it increases market participation. With more companies across the sectors getting listed on bourses, the breadth and the depth of the stock market improves. With the breadth and depth in market available, an increasing amount of institutional participation can be expected. And when that happens, price discovery becomes more efficient and with improved price discovery wealth is created at an unprecedented level, if one was to go by what history has taught us regarding the US markets.

"When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research and analysis before making any investment decisions."

As of now, the investors’ confidence is high and the IPO returns have created a sense of euphoria in the markets. The extraordinary performance of newly listed companies can easily lead to complacency in the markets and here is where one needs to remain optimistically cautious. The way IPOs are performing, there has been created an impression that one can apply to any IPO in 2021 and expect a stellar listing. But one has to be selective of the IPO no matter what the overall picture may be and invest only in those IPOs where one would want to hold on to the newly listed stocks for the long term. Investing only for listing gains may not work all the time.

Given the risk mood of the markets along with increased participation of retail investors and supportive global markets, in all likelihood we will see above average performance of IPOs to continue throughout the year. The liquidity is strong and shows no sign of abetment. Investors are well-advised to participate fully in the current IPO boom, albeit only in those IPOs where the prospects are bright for both the listed company and the industry where the company is operational in. Always remember that industry analysis and studying the prospects of the industry is equally important while studying the IPO prospects.

For investors what matters is listing gains, number of opportunities and the size of the IPO. Bigger the size of the IPO, the more will be the number of investors that can participate and actually get some decent allocation. With higher listing gains the annualised returns are magnified and thus it is easy to outperform the markets. When we have a higher number of companies getting listed, it creates a greater number of market-beating opportunities and that keeps investors’ wealth-creating machine rolling on. The year 2021 has delivered on all fronts in the first half 2021 at least, be it the number of opportunities created or the amount raised or the listing gains. There is no reason to not be bullish about IPOs for the remaining part of 2021.

 

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