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This article is more than 3 month old.

Bottomline: IPO market is red hot, but set your expectations right

Mini

The IPO market is booming, but most of the money being raised is by exiting pre-IPO investors. What does this spell for incoming investors.

Bottomline: IPO market is red hot, but set your expectations right
Over Rs 133,500 crore has been taken off the table by promoters and pre-IPO private investors (private equity/venture capital or other high net worth investors) over the past four-and-a-half years. More importantly, that’s near 75 percent of the total Rs 178,000 crore raised via initial public offers (IPOs) during the period.
What this suggests, is that businesses are now turning to private investors for their early growth financing and coming to the public markets only once they’ve attained a certain size and scale. That’s a far cry from the old days when ambitious entrepreneurs with limited capital resources ventured into the market to bridge the equity gap needed to meet their debt-equity obligations to get their dream projects off the ground.
This development has significant implications for investors in today’s IPOs. We’ll get to that. First, let’s take a closer look at the emerging trend.
The offers to sell
Most IPOs today have a significant proportion of shares being sold by promoters and pre-IPO private investors. A random study of a few recent and upcoming prominent IPOs bears this out. The just-concluded Devyani International IPO had an offer for sale (OFS) portion of about Rs 1400 crore and a fresh issue of Rs 440 crore. The Cartrade IPO is has a Rs 3000 crore OFS and no fresh issuance. Other eagerly awaited IPOs of Nykaa—Rs 3500 crore OFS, Rs 525 crore fresh issue—and Policybazaar—Rs 2267 crore OFS and Rs 3750 crore fresh issue—too have a large equity sale component.
A look back at data from PRIME over time reveals that the offer-for-sale phenomena have gained significant traction over the past 4-5 years, garnering most of the IPO issue proceeds. The sale of shares via IPOs was near zero till 1997, there were a few years thereafter till about 2002 that saw some share sales, but again never a large quantum of the overall proceeds. Fiscal ended 2004 and 2005 were the first time share sales topped 40 percent of the overall IPO proceeds in a year. There was a lull again. Then in fiscal ended 2011 (FY2011), the shift picked up again. But the big surge happened between FY2018 and FY20, with each of the three years seeing a greater than 80 percent share of OFS in the IPO proceeds raised.
The trend seems to have shifted lower thereafter, but that’s not really the case. As Pranav Haldea of PRIME points out, “A few issues like Zomato have skewed the data.” If we exclude Zomato, IRFC and Glenmark Life Sciences from the IPO list since April 2020, the OFS share climbs to 75 percent. In fact, of the 46 IPOs since April last year, 33 issues had an OFS share of >50 percent, half (23) had a share of over 75 percent and 15 had a 90 percent or higher share.
SNO.COMPANYOPENINGDATE FRESHCAPITALAMOUNT(Rs. crore) OFFERFOR SALEAMOUNT(Rs. crore) ISSUEAMOUNT(Rs.crore)OFS/Total Issue (%)
1NAZARA TECHNOLOGIES LTD.17-03-2021               -       582.69      582.69100.00
2COMPUTER AGE MANAGEMENT SERVICES LTD.21-09-2020               -    2,243.12   2,243.12100.00
3MAZAGON DOCK SHIPBUILDERS LTD.29-09-2020               -       443.69      443.69100.00
4UTI ASSET MANAGEMENT CO.LTD.29-09-2020               -    2,159.88   2,159.88100.00
5RAILTEL CORP.OF INDIA LTD.16-02-2021               -       819.24      819.24100.00
6EASY TRIP PLANNERS LTD.08-03-2021               -       510.00      510.00100.00
7CLEAN SCIENCE & TECHNOLOGY LTD.07-07-2021               -    1,546.62   1,546.62100.00
8G.R.INFRAPROJECTS LTD.07-07-2021               -       962.37      962.37100.00
9SONA BLW PRECISION FORGINGS LTD.14-06-2021       300.00    5,250.00   5,550.0094.59
10MRS.BECTORS FOOD SPECIALITIES LTD.15-12-2020         40.57       499.97      540.5492.50
11ROLEX RINGS LTD.#28-07-2021         56.00       660.00      716.0092.18
12KRISHNA INSTITUTE OF MEDICAL SCIENCES LTD.16-06-2021       200.92    1,942.82   2,143.7490.63
13HERANBA INDUSTRIES LTD.23-02-2021         60.00       565.24      625.2490.40
14DODLA DAIRY LTD.16-06-2021         50.00       470.18      520.1890.39
15ROSSARI BIOTECH LTD.13-07-2020         50.00       446.25      496.2589.92
16INDIA PESTICIDES LTD.23-06-2021       100.00       700.00      800.0087.50
17HAPPIEST MINDS TECHNOLOGIES LTD.07-09-2020       110.00       592.02      702.0284.33
18CRAFTSMAN AUTOMATION LTD.15-03-2021       150.00       673.70      823.7081.79
19GLAND PHARMA LTD.09-11-2020    1,250.00    5,229.55   6,479.5580.71
20MTAR TECHNOLOGIES LTD.03-03-2021       123.52       472.90      596.4179.29
21HOME FIRST FINANCE CO.(INDIA) LTD.21-01-2021       265.00       888.72   1,153.7277.03
22STOVE KRAFT LTD.25-01-2021         95.00       317.63      412.6376.98
23DEVYANI INTERNATIONAL LTD.#04-08-2021       440.00    1,335.87   1,775.8775.22
24INDIGO PAINTS LTD.20-01-2021       299.73       869.39   1,169.1274.36
25ANTONY WASTE HANDLING CELL LTD.21-12-2020         85.00       214.99      299.9971.67
26KRSNAA DIAGNOSTICS LTD.#04-08-2021       400.00       795.43   1,195.4366.54
27BARBEQUE-NATION HOSPITALITY LTD.24-03-2021       180.00       272.87      452.8760.25
28ROUTE MOBILE LTD.09-09-2020       240.00       360.00      600.0060.00
29WINDLAS BIOTECH LTD.#04-08-2021       165.00       230.36      395.3658.27
30SURYODAY SMALL FINANCE BANK LTD.17-03-2021       248.42       333.56      580.8457.43
31TATVA CHINTAN PHARMA CHEM LTD.16-07-2021       225.00       275.00      500.0055.00
32LAXMI ORGANIC INDUSTRIES LTD.15-03-2021       300.00       300.00      600.0050.00
33ANGEL BROKING LTD.22-09-2020       300.00       300.00      600.0050.00
34CHEMCON SPECIALITY CHEMICALS LTD.21-09-2020       165.00       153.00      318.0048.11
35EQUITAS SMALL FINANCE BANK LTD.20-10-2020       280.00       237.60      517.6045.90
36BURGER KING INDIA LTD.02-12-2020       450.00       360.00      810.0044.44
37INDIAN RAILWAY FINANCE CORP.LTD.18-01-2021    3,088.92    1,544.46   4,633.3833.33
38KALYAN JEWELLERS INDIA LTD.16-03-2021       799.87       374.94   1,174.8231.91
39GLENMARK LIFE SCIENCES LTD.27-07-2021    1,060.00       453.60   1,513.6029.97
40SHYAM METALICS & ENERGY LTD.14-06-2021       656.85       251.94      908.8027.72
41EXXARO TILES LTD.04-08-2021       131.99         26.41      158.4016.67
42ZOMATO LTD.14-07-2021    9,000.00       375.00   9,375.004.00
43LIKHITHA INFRASTRUCTURE LTD.29-09-2020         61.20               -        61.200.00
44NURECA LTD.15-02-2021       100.00               -      100.000.00
45ANUPAM RASAYAN INDIA LTD.12-03-2021       760.00               -      760.000.00
46MACROTECH DEVELOPERS LTD.07-04-2021    2,500.00               -   2,500.000.00
Source: primedatabase.com
So, the primary market’s role as a source of fresh capital has clearly diminished in significance in recent years.
Zomato opens the gates
The big watershed for new-age businesses has been the Zomato IPO. Till now, there was always been a doubt whether the internet business valuations will be accepted by main-street. That twain has finally met. The tremendous response to the Zomato IPO and its bumper listing has paved the way for new-age businesses to enter the mainstream. Exits for private investors had always been a big issue, and a good exit was the reason for celebration. With the IPO route opening up for such businesses, private investors now have a promising new exit route to bank on.
That’s a great and significant development for private investors. It need not necessarily follow that the same is true for IPO investors.
Time to reset expectations
Given that businesses are now coming to market to give pre-IPO investors exits, the chances of catching a stock like Infosys early and earning the kind of compounded returns it has delivered to shareholders since listing appears slim. The businesses coming to market today have mostly already raised capital from private investors, and attained a certain scale. That does reduce the risk of loss for investors, as the businesses are more established. But what it also does, is limit the gains from investment, as these businesses are now looking at more steady growth with stability, than heady growth with risk.
The other important aspect is valuations. The recent IPO boom has offered many private investors an opportunity to exit their investments at handsome profits. This is true not only for IPOs. Even recent share sales by Carlyle in SBI Life and Barings in Coforge, suggest that these investors think this is a good time to take some profits. And why not. Most private investors get in well before a scale-up stage, and the kind of returns they target are higher than public markets traditionally offer. For them, these are mature investments.
Some of this also, raises the risk of IPO investors getting in a little late. Take the case of the upcoming IPO of Policybazaar’s parent PB Fintech. Besides other private investors, even the promoters with slim holdings are looking to rake in Rs 95 crore by selling shares in the offer.
A business raising fresh funds without diluting any promoter equity inspires confidence, as it locks in the promoters’ wealth to the success of the business.
Whereas, a business with promoters looking to take money off the table, always raises doubts about the true intentions of the raise. And lines like “achieving the benefits of listing” just sound fatuous.
Why would a business that can manage its affairs privately expose itself to public scrutiny and a myriad other compliance if there’s no interest in the money? And mind you, the compliances come at a cost.
So, when you look at investing in the IPOs today, set your expectations right. And if it’s the new age ones, you need to be even more careful. While the jury is still out on whether they will deliver returns to shareholders despite the seemingly lofty valuations, I’m inclined to be cautiously pessimistic.
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