IPOs: 2022 Could be a Blockbuster Year

There is no doubt 2021 will be remembered as the most spectacular year for initial public offering (IPOs).

The Indian IPO ecosystem blossomed on the back of ample amount of liquidity, increased retail participation, low global interest rates, and many other factors.

Despite the uncertainties cause by the Covid-19 pandemic, large number of companies headed towards primary markets to raise funds.

According to a report, the number of domestic public issue on the NSE has surged by 113.3% since 2019.

This year's domestic IPOs raised US$13.4 bn. Even the US$10.5 bn raised in 2017 pales in comparison.

This shows us how crazy the IPO frenzy was in 2021. But the question is, will the trend continue in 2022?

In an effort to give you an overall picture of India's IPO boom in the current and the coming year, we reached out to Pranav Haldea, Managing Director at Prime Database Group.

In this conversation, Pranav presents some pretty fascinating data points.

Read on for a very insightful interview...

Equitymaster - 2021 has been a record year in terms of IPOs. Please can you put this into perspective of the earlier IPO frenzies.

Pranav - The primary market always follows the secondary market, albeit with a lag. A bullish secondary market has always been followed by a spate of IPOs and, in this context, the story is the same in 2020 and 2021.

As we know, the secondary market had reached historical lows in March 2020 because of Covid.

Since then, we have seen a strong rally in the secondary market, which has now reached all-time highs. Primary market came into action in July 2020, 3-4 months after the secondary market rally.

2021 though shall be remembered for several reasons:

• Nearly double of the best previous IPO year (2017) was raised in 2021. Rs 1.2 tn in comparison to Rs 688.3 bn in 2017.
• IPOs from new age loss making technology startups. Zomato followed by CarTrade, Nykaa, Policybazaar, Paytm, etc.
• Largest IPO ever in the history of Indian IPO market from One 97 Communications (Paytm) for Rs 183 bn.
• Strong retail participation with 6 IPOs attracting more than 30 lakh retail applications.
• Huge listing gains in IPOs.

Equitymaster - Do you think the danger of Omicron can impose threat to the IPO market going forward? Have you seen any patterns that confirm or deny that?

Pranav - As mentioned above, the primary market mirrors the secondary market.

Omicron represents a very clear and present danger and we have already seen its impact in terms of the volatility in the secondary market.

If the fears about its spread are true and if it does result in lockdowns and slowdown in business activity etc, you will see a correction in the secondary market which shall result in a slowdown in the primary market as well.

Equitymaster - What's your take on the IPO rush in India's start-up space and how it demonstrates the country's evolving startup funding ecosystem? How does it compare to the Telecom-media-Tech (TMT) boom of the late 1990s?

Pranav - There has been a lot of commentary this year around the fact that a higher offer for sale (OFS) component or a pure OFS IPO should be looked at negatively. I don't subscribe to this logic.

I think it's a sign of a maturing capital market ecosystem wherein the early-stage risk capital is provided by angel investors, venture capitalists, and private equity investors, unlike the 90s and early 2000s wherein these companies used to come to the primary market for this risk capital.

The risk capital provided by these investors fuels the initial growth of these companies. As we know, the early stage of a company is also the riskiest and majority of companies do not survive this phase.

The ones which survive and reach a certain level of maturity/ stability are the ones which come to the primary market, also in part to provide an exit to the early-stage investors.

Providing this exit is critical as it gives ammunition again to such investors to re-deploy this money in more new companies.

Equitymaster - Nowadays, many IPOs are priced at sky-high valuation. High demand has driven valuations to levels not seen since the dot-com bubble two decades ago. Please share your views on this.

Pranav - I do not subscribe to this high/acceptable valuation commentary. What is sky high valuation?

I can give countless examples of IPOs from previous IPO cycles (most prominent of which is the IPO of Avenue Supermarts) wherein it was said that the valuation is very high and investors should stay away. Several of these IPOs have given stellar returns.

In my view, if an IPO gets subscribed to even by just 1 time, it means that there was enough demand for it. After all, no one is forcing anyone to buy an IPO! A valuation can only be called 'sky high' if the IPO doesn't find enough takers and fails.

We should also remember that it is in the interest of the issuer and the bankers to ensure a successful issue. As such, they would not like to price it in a manner that there is not enough demand for it.

We should also remember that in India, promoters continue to hold significant amounts post IPO as well. As such, their wealth is linked to the post IPO price performance too.

Also, on the contrary, when an IPO gives huge listing day return like was the IRCTC, we say that too much money was left on the table and it was priced cheaply.

Equitymaster - What do you think the situation with IPOs will be like in the year 2022? How's the pipeline looking?

Pranav - The pipeline is very strong. 2021 also broke all records in terms of number of companies filing their DRHP with the market watchdog for approval.

As many as 115 companies filed their offer document for approval. To put this in context, 2019 and 2020 cumulatively had a total of just 50 filings.

Following from the record number of filings, the IPO pipeline continues to remain strong with 35 companies holding market regulator's approval proposing to raise roughly Rs 500 bn and another 33 companies which are awaiting regulator's approval to raise about Rs 600 bn.

This, of course, excludes the much anticipated mega IPO of LIC which is expected to be launched in this fiscal.

However, as seen in the past, it does not take too long for the pipeline to disappear. For IPO launches to continue, the secondary market needs to remain bullish.

Equitymaster - Any message for IPO focused investors? Any lessons you would like to share from past IPO cycles.

Pranav - In my view, retail investors should stick to mutual funds. If they have greater risk appetite, they can look at direct equity.

Only if they have very high-risk appetite, should they consider investing into IPOs. IPO is inherently a riskier asset class. There are information asymmetry and lesser disclosures in public domain. Also, there is no true price discovery as there are very few sellers in comparison to the number of buyers. As such, it is a seller's market.

However, if retail investors do wish to invest in IPOs, they should be very clear about their strategy and expectation.

In a bull market, they can invest with the expectation of a listing gain and exit on the listing day. Of course, this strategy is quite risky as even in a bullish market, not all IPOs give a listing return.

The other more traditional strategy is to come in for the long term after studying the company, management, governance, financial, comparison with listed peers etc.

Happy Investing!