What is Fuelling the IPO Investment Boom in India?

10 Feb 2021by Aditya Anand Bapat

What is Fuelling the IPO Investment Boom in India?

The primary markets, commonly referred to as the IPO markets, are on a roll. Companies are hitting the street in a hurry and investors are lapping up IPOs like there’s no tomorrow! In fact, in calendar year 2020, 15 companies raised nearly Rs. 27,000cr, more than twice the money raised in CY2019 from a similar number of IPOs.

The number in CY2021 till now is even more robust. In the first month of the year itself, four companies have raised more than Rs. 7,300cr. Almost all of these IPOs have received very high subscription figures and stellar debuts on bourses. So what’s leading to this frenzy? Let’s find out.

What is an IPO?

IPO or Initial Public Offering is a mechanism by which a privately owned company becomes a publicly owned company. In other words, promoters and other investors sell some of their stake to the general public and other large investors. By doing this, promoters and key investors can monetize some of their stake in the company, new investors can enter and the company can raise funds for future capacity expansion, debt repayment and other purposes. The process also creates a transparent and liquid platform for buying and selling of company’s shares. The success of an IPO is decided by two main factors:

  1. The amount of subscription it receives from all types of investors
  2. The response it gets on the day of listing

Point #1 depends on the company itself – financials, management quality, future growth prospects and so on. Point #2 can get influenced somewhat by market sentiment prevailing on the day of listing.

For now, we shall not get into any further technical details regarding IPOs as this background is good enough to understand the rest of the article.

Proof of the pudding

Here’s a summary of the IPOs that got listed in CY2020 and CY2021 (till date):

Company

Issue Close

Date

Issue Size

(Rs. Cr.)

Overall

Subscription (xs)

Issue Price

(Rs.)

Listing

Date

Listing day

Gains (%)

Current

Gains (%)

CY2020

 

 

 

 

 

 

 

SBI Cards and

Payment Services  

05-Mar-20

10,286

27

755

16-Mar-20

-10%

32%

Rossari Biotech  

15-Jul-20

496

3

425

23-Jul-20

75%

113%

Happiest Minds

Technologies  

09-Sep-20

702

151

166

17-Sep-20

123%

113%

Route Mobile  

11-Sep-20

600

73

350

21-Sep-20

86%

224%

Computer Age

Management Services  

23-Sep-20

2,244

47

1230

01-Oct-20

14%

48%

Chemcon Speciality

Chemicals  

23-Sep-20

318

149

340

01-Oct-20

72%

31%

Angel Broking  

24-Sep-20

600

4

306

05-Oct-20

-10%

15%

Mazagon Dock

Shipbuilders  

01-Oct-20

444

157

145

12-Oct-20

19%

49%

Likhitha Infrastructure  

07-Oct-20

61

10

120

15-Oct-20

14%

71%

UTI Asset

Management Co

01-Oct-20

2,160

2

554

12-Oct-20

-14%

3%

Equitas Small

Finance Bank  

22-Oct-20

518

2

33

02-Nov-20

-1%

30%

Gland Pharma  

11-Nov-20

6,480

2

1500

20-Nov-20

21%

43%

Burger King India  

04-Dec-20

797

157

60

14-Dec-20

131%

138%

Mrs. Bectors

Food Specialities  

17-Dec-20

541

198

288

24-Dec-20

107%

44%

Antony Waste

Handling Cell  

23-Dec-20

300

4

315

01-Jan-21

29%

-3%

TOTAL

 

26,546

 

 

 

 

 

 

 

   

 

 

 

 

CY2021 till date

 

   

 

 

 

 

Indian Railway

Finance Corporation  

20-Jan-21

4,633

3.49

26

29-Jan-21

-4%

-5%

Indigo Paints  

22-Jan-21

1,176

117.02

1490

02-Feb-21

109%

102%

Home First Finance

Co India  

25-Jan-21

1,154

26.66

518

03-Feb-21

NA

NA

Stove Kraft  

28-Jan-21

413

18.03

385

To be listed

NA

NA

TOTAL

 

7,376

 

 

 

 

 

Source: Chittorgarh.com, Moneycontrol.com, BSE Website

As seen in this table, most IPOs have received very enthusiastic response from investors, resulting in high subscription figures. Also, these have created significant wealth for investors since their listing. No doubt the stock markets are doing extremely well currently. Let us examine few more reasons why the IPOs have been receiving such good response.

Why this mad mad mad rush for IPO investment?

So what is the reason for this scramble for IPOs? It’s not just IPOs but even broader markets which are rallying. Let us examine the reasons one by one for the same. Some reasons could be common to IPOs and broader markets.

  1. Entry of new kids on the block – retail investors

During lockdown months, a flurry of retail investors and first time traders entered the capital markets. They were lured by low market levels in March-April, 2020 and also traction from discount brokers. As per SEBI data, demat accounts grew from 39.6mn in January, 2021 to 47.6mn in October, 2020, rise of 20% in as less as 10 months, despite COVID times.

Source: SEBI Data

  1. Eeny meeny miny moe, Equities is the way to go!!

The scenario in India is that there are hardly any investing options that are giving good returns. FD rate for SBI is a measly 4.40% for 1yr, real estate rates have hardly moved over the past few years, PPF rates have come down 100bps over past five years to 7.10%. BitCoin market is beyond comprehension for most common investors. Gold is purchased in India more in physical form rather than E-Gold. So the most obvious choice is equity markets. 

Asset

Returns in CY2020 (%)

Bank Fixed Deposits

6.25%

Equity - Large Cap

15.46%

Equity -- Mid-Cap

24.30%

Equity -- Small Cap

30.41%

Short Duration Bond Funds

9.73%

Long Duration Bond Funds

12.53%

Liquid Funds

4.16%

International Funds

19.08%

Gold

27.32%

Real Estate -- Commercial

8.25%

Real Estate -- Residential

2.00%

Source: Moneycontrol.com

 

  1. The bigger a war chest you build during times of peace, the less you bleed during war

For owners of companies which are hitting the primary markets, this seems to be the right time to raise funds, build a war chest to tide against tough times and strengthen their balance sheets. Early stage investors, who navigated tough times with these companies are looking to cash in the current boom and take some profits off the table.

  1. Pent up demand

India’s economy had been slowing down even before the pandemic hit us. This led to lackluster markets last calendar year with hardly any appetite for fresh equity. Hence, companies were waiting on the sidelines to raise money. As markets surged post April, 20 and continued climbing higher, companies saw this as a right opportunity to hit the primary market.

  1. Boom Boom Markets!

A booming stock market is usually followed by slew of IPOs. General exuberance in markets often makes IPOs deliver stellar returns on the listing day and sometime thereafter. A word of caution though, this exuberance lasts only so long as markets remain buoyant and fizzles out thereafter.

  1. Cheap money and liquidity

The world is flush with liquidity as global central banks have reduced rates in order to keep economies afloat in a pandemic-affected world. FII data sourced from website Moneycontrol also vindicates our claim – FIIs have been net sellers in equities only once between April, 2020 and January, 2021. Devoid of any returns in the developed world, markets such as India offer great returns to FIIs.

Source: Moneycontrol.com

Look out for these IPOs in 2021

Company

Tentative IPO date

Tentative IPO Size (Rs. Cr.)

LIC

Sometime in FY22

                                        70,000

Nykaa

Sometime in FY22

 NA

Kalyan Jewellers

Jan-Mar'2021

                                           1,750

Bajaj Energy

2021

                                           5,450

Studds Accessories

Feb'2021

                                              450

Barbeque Nation

2021

 1,000 -1,200

Suryoday Small Finance Bank

2021

                                              400

ESAF Small Finance Bank

2021

                                           1,000

Laxmi Organic Industries

2021

                                              800

Craftsman Automation

2021

 150 - 180

Apeejay Surendra Park Hotels

2021

                                           1,000

RailTel Corporation of India

2021

                                              700

SAMHI Hotels

2021

                                           2,000

Shyam Steel

2021

                                              500

Annai Infra Developers

2021

 200 - 225

Source: Groww.in, Moneycontrol.com. Please note that this is not an exhaustive list but indicative.

Let the dust settle, let things get clearer

I don’t want to sound like a party-spoiler, but this incessant appetite for every other IPO investment is unsustainable. When the dust settles, when markets return to normalcy, we’ll be able to separate the wheat from the chaff. This is not to say that the recently listed companies are bad, but the rally is simply too swift.

History has shown that not-so-good IPOs that get listed at a premium and surge thereafter can slump to much lower than listing price or even issue price once quarterly performance starts coming in. Once again, there’s no alternative to fundamental analysis in the long term. Enjoy the party while it’s there. After it’s over, come and meet us and we’ll chart out a long term sustainable wealth creation plan for you.

To create a winning stock portfolio of 20-25 multibagger stocks click here.

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