Question

Is the companies interest in holding IPOs likely to increase or decrease in the future?

Answer 1

Each IPO should be judged on a case by case basis although recent trends suggest that investors' appetite for them will continue since performance has been exceptional. Almost all companies that went public since 2016 are trading significantly above their IPO listing prices. If the Qualified Institutional Buyers (QIB) portion of public issue continues to be oversubscribed, then the returns could be attractive in the future.

Today, market has moved to a certain landmark, where investment is in its ripest stage due to constant disruptions and a changing the scenario. The stakes have been raised to another level as organizations are trying to trounce each other to reach to the pinnacle. The constant ups and downs have made it difficult for certain organizations to keep up the investment or momentum on a profitable level and hence, initial public offerings (IPO) have risen to an enhanced level. The rate of initial public offerings (IPOs) has hit an all time high as public is warming up to the idea of purchasing stocks of reputed organizations. Also, the influx of easy money has subsequently has resulted in IPOs being significantly oversubscribed.

Each IPO should be judged on a case by case basis although recent trends suggest that investors' appetite for them will continue since performance has been exceptional. Almost all companies that went public since 2016 are trading significantly above their IPO listing prices. If the Qualified Institutional Buyers (QIB) portion of public issue continues to be oversubscribed, then the returns could be attractive in the future.

IPOs are generally launched in bull markets when promoters and other shareholders of the company want to sell their stake and cash out a part of their holdings. Since there is hardly any historical analysis of the performance of companies going public, the red herring prospectus is the main source of data. The underwriters of the IPO issue typically publicize facts and performances of the company so that investors can get an idea of whether it is a worthy investment opportunity. Usually upcoming IPOs are portrayed as once in a lifetime opportunity because it can happen only once for each company. For retail investors, it's important to understand in which stage of the bull market IPOs are launched. Usually, the highest amount of money is made when the overall market sentiment is rampantly bullish. Although valuations are priced high, the market will do very well.

One of the generic reasons of a favourable scenario is that often, IPOs have elevated operating margins and lowered valuation in comparison with its established and reputed peers. The following reasons on why an IPO is an attractive deal:

1.   With a sustainable economic enlargement, aided by government policies going in favour of conducting business, organizations are successful in scaling up to a level, to gain credibility in the market. This allows organizations to approach primary market for accessing funding through the IPO.
2.   Another factor that has boosted the market recently is the government initiative to divest its holding in some public sector undertaking.
3.   Post remaining subdued for almost couple of years, Indian IPO market has witnessed an upward swing in momentum. This can be contributed to eschewing a positive sentiment, triggered by a gradual yet concrete improvement general economic and investment environment.
4.   Contributed to an emerging global volatility and throughout struggles of the emerging markets, a plethora of foreign investors are opening up to the idea of investing in India as the country is better prepared to hold on its own and withstand global slowdown.
5.   As a glimpse into the distant future, India's projection of development is moving on a robust scale, anticipating which has made investors more open to bring investment in the IPO market.

The upcoming IPOs in the insurance sector may be well received by the markets as many companies in the public and private sector are getting publicly listed (SBI Life, HDFC Life, etc.). Apart from that, NSE plans to issue an IPO in the near future and is expected to garner massive interest from all sections of the investor community. BSE & CDSL listings have both been very successful. Overall, financial services companies have dominated by accounting as most of the total fund raise in recent times. Going forward, if the existing IPO shares stabilize above the issue prices, the trend will continue and more stocks will continue to do well upon listing. A total of ?45,000 Crores has been raised via IPOs in 2016 and 2017 alone. When compared to the last few years, there has been a multi fold rise. The likely outcome is that there are going to be an increasing number of private companies which will choose to issue IPOs because there is public appetite for investing now. The party will continue if the valuations are reasonable. If the issuers and merchant bankers get greedy and pump the valuations higher, at some point it may lead to stocks crashing in the future. This will ultimately caution investors and moderate the bullishness. If that happens, investors will then become more selective about which IPOs to invest in.

Considering there seems to be a certain amount of froth in the mid/small cap stocks, IPOs become a very viable alternative to investing in secondary markets. Collective investor expectations can continue to give them handsome returns as long as the system is not abused by an oversupply of large IPOs. SMSE and small cap public issues actually are a boon to the ecosystem because these companies raise small amounts and they don't have the capacity to suck up too much liquidity out of the system. Even if there are disappointing performances, it will not upset the market sentiment as much as an underperformance from a major public issue.

IPOs are an attractive investment as of now, as long as the performance continues and the overall market continues to stay in an uptrend. In my opinion, NIFTY valuations are going to sustain at 25 PE or higher. In such an environment, selectively investing in IPOs can yield very healthy returns. If this has to last then on an average, companies which got listed in 2016 and 2017 need to settle above their listing prices and give decent returns to investors. Only then will it continue to fuel the growing interest in IPOs.