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.||COMPANY||OPENINGDATE||FRESHCAPITALAMOUNT(Rs. crore)||OFFERFOR SALEAMOUNT(Rs. crore)||ISSUEAMOUNT(Rs.crore)||OFS/Total Issue (%)|
|1||NAZARA TECHNOLOGIES LTD.||17-03-2021||-||582.69||582.69||100.00|
|2||COMPUTER AGE MANAGEMENT SERVICES LTD.||21-09-2020||-||2,243.12||2,243.12||100.00|
|3||MAZAGON DOCK SHIPBUILDERS LTD.||29-09-2020||-||443.69||443.69||100.00|
|4||UTI ASSET MANAGEMENT CO.LTD.||29-09-2020||-||2,159.88||2,159.88||100.00|
|5||RAILTEL CORP.OF INDIA LTD.||16-02-2021||-||819.24||819.24||100.00|
|6||EASY TRIP PLANNERS LTD.||08-03-2021||-||510.00||510.00||100.00|
|7||CLEAN SCIENCE & TECHNOLOGY LTD.||07-07-2021||-||1,546.62||1,546.62||100.00|
|9||SONA BLW PRECISION FORGINGS LTD.||14-06-2021||300.00||5,250.00||5,550.00||94.59|
|10||MRS.BECTORS FOOD SPECIALITIES LTD.||15-12-2020||40.57||499.97||540.54||92.50|
|11||ROLEX RINGS LTD.#||28-07-2021||56.00||660.00||716.00||92.18|
|12||KRISHNA INSTITUTE OF MEDICAL SCIENCES LTD.||16-06-2021||200.92||1,942.82||2,143.74||90.63|
|13||HERANBA INDUSTRIES LTD.||23-02-2021||60.00||565.24||625.24||90.40|
|14||DODLA DAIRY LTD.||16-06-2021||50.00||470.18||520.18||90.39|
|15||ROSSARI BIOTECH LTD.||13-07-2020||50.00||446.25||496.25||89.92|
|16||INDIA PESTICIDES LTD.||23-06-2021||100.00||700.00||800.00||87.50|
|17||HAPPIEST MINDS TECHNOLOGIES LTD.||07-09-2020||110.00||592.02||702.02||84.33|
|18||CRAFTSMAN AUTOMATION LTD.||15-03-2021||150.00||673.70||823.70||81.79|
|19||GLAND PHARMA LTD.||09-11-2020||1,250.00||5,229.55||6,479.55||80.71|
|20||MTAR TECHNOLOGIES LTD.||03-03-2021||123.52||472.90||596.41||79.29|
|21||HOME FIRST FINANCE CO.(INDIA) LTD.||21-01-2021||265.00||888.72||1,153.72||77.03|
|22||STOVE KRAFT LTD.||25-01-2021||95.00||317.63||412.63||76.98|
|23||DEVYANI INTERNATIONAL LTD.#||04-08-2021||440.00||1,335.87||1,775.87||75.22|
|24||INDIGO PAINTS LTD.||20-01-2021||299.73||869.39||1,169.12||74.36|
|25||ANTONY WASTE HANDLING CELL LTD.||21-12-2020||85.00||214.99||299.99||71.67|
|26||KRSNAA DIAGNOSTICS LTD.#||04-08-2021||400.00||795.43||1,195.43||66.54|
|27||BARBEQUE-NATION HOSPITALITY LTD.||24-03-2021||180.00||272.87||452.87||60.25|
|28||ROUTE MOBILE LTD.||09-09-2020||240.00||360.00||600.00||60.00|
|29||WINDLAS BIOTECH LTD.#||04-08-2021||165.00||230.36||395.36||58.27|
|30||SURYODAY SMALL FINANCE BANK LTD.||17-03-2021||248.42||333.56||580.84||57.43|
|31||TATVA CHINTAN PHARMA CHEM LTD.||16-07-2021||225.00||275.00||500.00||55.00|
|32||LAXMI ORGANIC INDUSTRIES LTD.||15-03-2021||300.00||300.00||600.00||50.00|
|33||ANGEL BROKING LTD.||22-09-2020||300.00||300.00||600.00||50.00|
|34||CHEMCON SPECIALITY CHEMICALS LTD.||21-09-2020||165.00||153.00||318.00||48.11|
|35||EQUITAS SMALL FINANCE BANK LTD.||20-10-2020||280.00||237.60||517.60||45.90|
|36||BURGER KING INDIA LTD.||02-12-2020||450.00||360.00||810.00||44.44|
|37||INDIAN RAILWAY FINANCE CORP.LTD.||18-01-2021||3,088.92||1,544.46||4,633.38||33.33|
|38||KALYAN JEWELLERS INDIA LTD.||16-03-2021||799.87||374.94||1,174.82||31.91|
|39||GLENMARK LIFE SCIENCES LTD.||27-07-2021||1,060.00||453.60||1,513.60||29.97|
|40||SHYAM METALICS & ENERGY LTD.||14-06-2021||656.85||251.94||908.80||27.72|
|41||EXXARO TILES LTD.||04-08-2021||131.99||26.41||158.40||16.67|
|43||LIKHITHA INFRASTRUCTURE LTD.||29-09-2020||61.20||-||61.20||0.00|
|45||ANUPAM RASAYAN INDIA LTD.||12-03-2021||760.00||-||760.00||0.00|
|46||MACROTECH DEVELOPERS LTD.||07-04-2021||2,500.00||-||2,500.00||0.00|
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.
(Edited by : Santosh Nair)