As IPOs Lure Primary Investors, Stock Markets Jump Erratically

Well, the ‘Wolf on Dalal Street’ has been prowling and growling since lockdowns were lifted in 2020 and humankind hesitantly returned to market(place)s.

This year, the BSE Sensex, which began at 72,271.94  on January 1, moved up erratically to touch a peak of 85,978.25 last Friday after several dips and highs throughout the year.

However, as this article goes to print, on October 3, 2024, the markets were in free fall and analysts calculated that in one single day of trading the market capitalisation shrank by Rs 9 lakh crore as benchmark indices Sensex and Nifty tanked over 2 per cent each.

Will this be the start of a bearish storm? Or will markets recover to touch new highs by Diwali?  

IPOs showed no such hesitation, though. As many as 215 initial public offers entered the Indian market in the last four years, and 70 per cent of them are still trading above their issue and secondary market listing price (as of July 31,2024).

The remaining part of 2024-25 promises to be similar with the queue for IPOs running out of standing room.

In just the last week, hordes of companies lined up at the office of the Securities & Exchange Board of India (SEBI) to file applications for new IPOs or collect approval letters for their planned listing.

The IPO Flood In The Market

As many as a dozen companies will launch their IPOs in October-November this year, including Hyundai Motor India, NTPC Green, Swiggy, Mouri Tech, NTPC Green Energy, Mamata Machinery, and others. Together, they are looking to raise around Rs 60,000 crore.

What is it that makes Indian markets such an IPO magnet? The answer lies in a concoction of easy money, conducive (even welcoming) investors, and peer pressure.

The high liquidity flooding India’s booming market economy is helping, as are the depressed international economy and investment appetite. The result is that D-Street bulls are hanging on to the horns for a wild ride that they hope will yield quick returns.

Let’s take just two stocks as recent examples – Vibhor Steel Tubes and BLS E-Services saw gains of 193 per cent and 175 per cent, respectively, on their listing day itself. In all, 21 IPOs reported gains of 10 per cent or more as soon as they entered the secondary market.

The numbers are a reminder of India’s first book-built issue in 1999, that of Hughes Software Systems, which proffered a price band of Rs 480 to Rs 630, was oversubscribed many times over at Rs 630, and listed in the market at Rs 1,100. Within days, it was trading at Rs 4,800.

Analysts agree that instantly high valuations and returns are the elixir that most investors live for. Investors, meanwhile, remain bullish in their outlook for the immediate future, given the recent past. India pipped all other nations with 76 IPOs in FY 2023-24, the highest in seven years, and a 111 percent increase from the 36 new listings of FY 2022-23.

“The fourth quarter of 2024 alone saw 21 IPOs, jumping from just two in the same period in the previous year. Driving this was strong business fundamentals, infrastructure investment, manufacturing growth, and steady consumer spending, making India the fastest-growing economy in the G-20 umbrella,” a KPMG Report said.

According to the EY Global IPO Trends report for Q2 of 2024, global IPO volumes slithered by 12 per cent, managing to raise monies that were an alarming 16 per cent lower than in the previous year. India, on the other end of the spectrum in FY 2024, has already surpassing FY 2023’s full-year record in the number of new IPOs and monies raised.

Warning Bells For IPO Chasers

Paradoxically, the IPO market is one where every cloud does not have a silver lining. While some have made a killing on secondary market listing prices, there is a long list of stragglers who have to contend with long-term cost of raised funds, increased scrutiny and regulatory responsibilities, oscillations of a market driven by sentiment and not fundamentals, and the new-found risk of a coalition regime being at the helm in the country.

Historically, the cost of equity has always been higher than that of debt. Additionally, debt has the advantage of having fixed (‘predictable’) finance costs. “Promoters Go-IPO to raise capital for expansion or acquisition, create liquidity, provide an exit route to early VCs, or increase visibility,” Prashanth Tapse, Senior VP Research, Mehta Equities, said.

“However, the cost of buying back shares to increase promoter stake gets higher if market prices keep rising. Equity dilution might look easy, but it is often costlier in the longer term,” he said.

A further drawback is the higher regulatory requirements post-listing in the stock market. Companies have to make greater and periodic disclosures of financial, accounting, and taxation information, which can be sensitive in nature and potentially useful to competitors.

Post-listing filings, thus, can even raise the risk of hostile takeovers. Even if all goes well, tricky queries posed by angry investors to the management at AGMs
can be a deterrent.

A CEO, part of a landmark Indian IPO two decades back, told The Secretariat, “AGMs can be rough. After years of giving bumper returns, we declared losses once. Proxy investors screamed. They asked me my salary, and which car I drove, abused me, and even threw the lunch boxes we provided at me. It was a scary experience.”

Other than tricky questions, political sensitivities, and market fluctuation, some are worried about the irrational exuberance of retail investors.

Most investors chase IPOs for listing gains without considering valuations or business fundamentals, they say. “We need to be cautious, thoroughly evaluate the company and industry space, and conduct due diligence. Investors should focus on the growth potential, not get carried away by short-term gain,” said one.

However, others like Nishant Srivastava, CEO of Torus Wealth, expect the positive IPO trend to continue. “Investors need to be wary, evaluate each opportunity, focusing on fundamentals and growth potential, and then take their decision. But the sheer number of new IPOs in the pipeline will keep the wave high,” he said.

As the saying goes, the waves will always be there; it is the crests and troughs that investors need to worry about.

(The writer is a veteran journalist and communications specialist. Views expressed are personal)