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Call it the Zomato moment. On July 23, as the foodtech major prepared to list on the Indian stock exchanges, it had everyone biting their nails, wondering if this was going to work. After all, Zomato had losses of Rs 816.43 crore in 2020-21, but its valuation in the private funding space jumped from $3.9 billion (about Rs 29,000 crore) in December 2020 to around $5.5 billion (a little more than Rs 40,000 crore) in February this year. Would the public valuation match the private one? Would investors bite into a loss-making start-up’s story? Would the company’s private investors make a killing or get killed by staking their, um, stakes in the stock markets? Well, look at it how you will, but Zomato’s IPO was an unqualified success—it was subscribed nearly 23 times, and the company mopped up Rs 9,375 crore from the issue. The stock touched a high of Rs 138 on the day of listing—a gain of nearly 82 per cent over its issue price of Rs 76. By all accounts, the company’s private investors did make a killing. As on September 9, the stock closed at Rs 141.55, market capitalisation stood at Rs 1,11,049 crore, and founder Deepinder Goyal’s net worth stood at close to Rs 5,230 crore on a shareholding of a mere 4.71 per cent.
Zomato’s success has put a muscular gale behind an already accelerating primary market in 2021. Market experts predict that the current calendar year could see IPOs worth an eye-popping Rs 1 lakh crore, a handsome margin over the current record of Rs 67,147 crore raised in 2017. “We believe an IPO raise of Rs 1 lakh crore is eminently feasible this calendar year,” says V. Jayasankar, Senior Executive Director and Head of Equity Capital Markets at Kotak Investment Banking, one of the largest domestic investment banking firms. “This IPO boom is unlike what we have seen in our capital market history.” The euphoria is being propelled not only by other start-up majors such as Paytm, MobiKwik, Policybazaar, PharmEasy, Ixigo and Delhivery, but even by several legacy businesses from various industries such as Aditya Birla Sun Life Asset Management Company, Go Airlines (India) and Jaikumar Constructions.
Now, guess who’s investing. Along with the big boys such as mutual funds, pension funds, insurance companies, foreign portfolio investors, etc., we can see some others, too. That would be you, me, your affable neighbour as also the chilly one, the average Jane next door...okay, the average Joe, too... you get the drift. It’s the retail investor, that perennial fence-sitter, who has crashed into the IPO party with energy accumulated over several years, nay, decades.
And that is exactly where the worry is.
Stock markets can be unforgiving. There have been instances in the past where celebrated IPOs have come a cropper, leaving bleeding investors wringing their hands in despair. Memories of the Reliance Power IPO that came in 2008 are still afresh. The mega issue—the fourth-largest till date with a size of Rs 10,123 crore—was priced at Rs 450 a share. It did touch a high of almost Rs 600 on the day of listing, but is currently hovering around a hopeless Rs 12. You could argue that much water has flown under the bridge since then, but the nature of stock markets doesn’t change. Following Zomato’s success, online majors are in the limelight with their mega-sized issues but one cannot ignore the fact that most digital companies including Paytm, MobiKwik and Policybazaar are loss-making. How their long-term story might play out—on both P&L and the bourses—is anybody’s guess.
So, before you reach for your wallet to jump into the next IPO, you might want to pay heed to what Pranav Haldea has to say: “If at all retail investors want to invest in an IPO, which is a risky asset class, they should invest for the long term.” Haldea should know. As the Managing Director of Prime Database, a primary market tracking firm, Haldea is well aware of the history of IPOs and their successes and failures. “A listed company is a much better bet as there are a lot of disclosures available in the public domain, plus the price discovery has already been done,” he adds. Investment bankers, who handle IPO-related work, expect the boom phase to sprint on for some time, but they also agree that there are concern areas in terms of valuations, liquidity and the overall appetite for public issues amongst investors.
Bottom line: Invest with care.
If at all retail investors want to invest in an IPO, which is a risky asset class, they should invest for the long term. A listed company is a much better bet as there are a lot of disclosures available in the public domain, plus the price discovery has already been done
Managing Director, Prime Database
But first, the good part. The Indian stock markets are on fire—both from a primary and secondary market point of view. The benchmark equity indices S&P BSE Sensex and NSE Nifty are the best performers among all the leading benchmarks globally this calendar year, with gains of more than 20 per cent each. Both Sensex and the broader Nifty are touching new highs almost on a weekly basis. As for the primary market, it is in the midst of its best-ever phase. The first eight months of 2021 have already seen 36 public issues worth a total of Rs 60,288 crore, as per data from Prime Database. Another nearly 15 IPOs cumulatively worth over Rs 20,000 crore are ready to launch anytime now. In addition, many more companies have filed their draft prospectuses with capital markets regulator Securities and Exchange Board of India (Sebi) and are expected to launch their IPOs once all the regulatory approvals are in place. While the first five days of September have already seen eight filings for an IPO, August witnessed nearly 30 companies file for a public issue.
Ajay Saraf, Executive Director & Head-Investment Banking, ICICI Securities, says the “momentum will not only maintain but even accelerate in the coming months, and next year we could see a repeat of this year”. He pins his hopes on the fact that “with specific interest in new-age companies, the entire IPO theme has been broad-based and not just limited to a particular sector, which augurs well for the entire IPO market”.
New retail investors are coming to the market and they will continue to support the IPO market. We don’t need an IPO frenzy. We need investors who understand the risk that they are taking and that the returns have to be seen from a 12-month perspective
Executive Director & Head – Investment Banking, ICICI Securities
Jayasankar feels the explosion in digital adoption by consumers because of Covid-19 and the lockdowns have played a big role in tech-native start-ups being looked at through a different lens: “Whether it is foodtech, fintech, healthtech, edtech or consumer tech, there has been an explosion of digital adoption [by consumers].” He also makes the point that Indian start-up listings can be benchmarked against listed peers in developed markets if there are none in India. “Investors benchmarked Zomato with DoorDash of the US and Meituan of China,” says Jayasankar of Kotak, which is one of the investment bankers in the forthcoming IPOs of Ixigo, Nykaa and Policybazaar. “The large addressable market and increasing adoption of digital technology are some of the reasons why investors believe digital technology companies will continue growing for multi-years,” he says, adding that institutional investors believe Indian digital technology companies benefit from the higher “India growth” factor.
I think we are just beginning to enter a phase where there is segregation between strong IPOs and relatively weaker ones. Overall, the outlook is still bullish, but it may not be easy to get a not-so-strong company to the IPO market and get very high valuations
Head of UBS Global Banking
But how does one put hard-earned money into IPOs of firms that boast huge valuations but have no profit to show? Investment bankers believe that more than profit, the path to profitability matters for digital majors. “Losses [of digital companies] are clearly a factor to look at. Both domestic and global investors evaluate this factor, especially in light of the path to profitability,” says Anuj Kapoor, Head of UBS Global Banking. “If the unit economics is established for such companies and you have a stable business model, then the addressable market in India is so big that if you are able to show a path to profitability over the next 12 to 24 months, investors are willing to bet on it.”
The IPO plans of digital majors have come as a shot in the arm for VC and PE firms. The buoyancy of the secondary markets attracted scores of companies to the capital market and this provided an attractive exit option for these deep-pocketed investors. While a total of 36 companies launched their IPOs to raise a cumulative Rs 60,288 crore till August, the offer for sale (or OFS) component accounted for nearly 59 per cent—Rs 35,230 crore —of that pie. (When an existing shareholder offers shares in an IPO, it is called an offer for sale.) “We are finally seeing the dawn of exits for PEs and VCs in India who have done a commendable job of patiently building this ecosystem over the past decade,” says Raj Balakrishnan, Head of India Investment Banking, Bank of America. “All their hard work and perseverance is now paying off in terms of significant value creation. With the potential for India to create 150+ unicorns, the appetite for Indian names will only go up, further cementing the confidence of VCs and PEs to invest in the Indian market.”
Spike in Covid cases, inflationary risks that drive the Fed to accelerate their withdrawal from the bond buying programme, interest rate movement, and relative impact on the rupee from these macro challenges will be key factors to watch for
Head of India Investment Banking, Bank of America
Several IPOs this year have seen PE or VC shareholders offer shares, including companies like Indigo Paints, Home First Finance Company, Stove Kraft, Craftsman Automation, Nazara Technologies, Suryoday Small Finance Bank, Barbeque Nation Hospitality, Krishna Institute of Medical Sciences, GR Infraprojects and Rolex Rings. Further, some of these public offerings had a larger OFS component when compared to the quantum of fresh issue of shares. For example, GR Infraprojects’ IPO, which opened in July to raise nearly Rs 1,000 crore, was entirely an OFS with funds like India Business Excellence Fund and India Business Excellence Fund I offering their shares along with the promoters to public shareholders.
Similarly, Indigo Paints and Stove Kraft both saw leading institutional investors and PE/VC majors SCI Investments and Sequoia offloading their shares as part of the IPO. The public issue of Craftsman Automation also saw International Finance Corporation as one of the selling shareholders. Global PE major General Atlantic sold its shares in the IPO of Krishna Institute of Medical Sciences, which raised nearly Rs 2,200 crore from the market. In the case of Rolex Rings, while the IPO size was Rs 731 crore, the fresh issue component was a mere Rs 56 crore while Rivendell PE LLC offloaded shares worth Rs 675 crore.
The highest quantum of OFS in a calendar year was seen in 2017 when shares worth Rs 55,468 crore were sold by existing shareholders in IPO-bound companies. Market participants believe that the current year could set a new record as the IPO pipeline is looking quite robust with many PE/VC-backed companies set to launch their public issues. For example, the upcoming IPO of Paytm will see entities like Alibaba, SoftBank and Elevation Capital (erstwhile SAIF Partners) selling their shares as part of the public issue. Sequoia Capital is one of the selling shareholders in the IPO of MobiKwik. Similarly, the IPO of Nykaa will see well-known names like TPG Capital and Lighthouse India offloading their shares while Policybazaar’s public issue will give an exit option to SVF Python (Cayman).
Retail investors have never been so bullish on stocks as they are now and, again, Covid-19’s lockdowns probably had a part to play. Clearly, the trend started last year when people were locked in their homes and had time on their hands to experiment in the stock market. And in 2021, the trend has only strengthened further. Data from the National Stock Exchange (NSE) shows that each month of the current calendar year saw an addition of nearly 1.3 million new retail investors. This is more than double that of last year when the average monthly addition was pegged at 0.6 million. In 2019, before the pandemic hit, average monthly addition was around 0.3 million.
The rising retail participation has significantly increased this group’s share of the market. The cumulative holding of all retail investors in companies listed on NSE touched an all-time high of 7.18 per cent on June 30—up from 6.96 per cent on March 31, 2021, and 6.55 per cent on March 31, 2020, when the pandemic began impacting the country.
The renewed interest of retail investors is visible in the primary markets as well. It began in February 2021 with the IPO of Nureca, which set a record for the highest subscription in the retail category. The Rs 100-crore issue was subscribed overall nearly 20 times, but the retail portion was subscribed a whopping 140.53 times—the highest-ever registered in the Indian capital markets, as per data from Prime Database. The issue managed to beat a 14-year-old record of 133.52 times held by Everonn Systems India since July 2007. This year saw two more issues that made it to the top 20 IPOs ever in terms of oversubscription in the retail category—Nazara Technologies (subscribed 68 times) and Easy Trip Planners (nearly 63 times).
“Retail investors are evolving and have realised that one can make money by being a patient investor. New retail investors are coming to the market and they will continue to support the IPO market,” says Saraf of ICICI Securities. “We don’t need an IPO frenzy. We need investors who understand the risk that they are taking and that the returns have to be seen from a 12-month perspective.” Risks are aplenty and there are a lot of variables at play. So, retail investors need to exercise care. The current calendar year has already seen its share of laggards where investors have burned their fingers and burned them badly. Take the example of Suryoday Small Finance Bank, which launched its IPO in March and priced its shares at Rs 305. The stock has more than halved and is currently trading at Rs 151.40 (on September 6). Kalyan Jewellers India, Windlas Biotech and Indian Railway Finance Corporation have all seen their share prices dipping more than 10 per cent when compared to their respective issue prices. Investors in the shares of CarTrade Tech, Glenmark Life Sciences, Krsnaa Diagnostics and Nuvoco Vistas Corporation are also reeling under losses.
“If you look at the performance of some of the recent IPOs, there is a fair number of issues that have not performed post-listing. That is a worrying sign,” says Kapoor of UBS. “I think we are just beginning to enter a phase where there is segregation between strong IPOs and relatively weaker ones. Overall, the outlook is still bullish, but it may not be easy to get a not-so-strong company to the IPO market and get very high valuations.”
If you are planning to invest in an IPO, make sure you read the section on risk factors in its draft document. This section includes details of ongoing and potential litigations, disputes, business risks and any other factor that could negatively impact the business in any manner in future. Even the IPO market is fraught with risk. Currently the situation looks quite conducive for companies to launch their offerings, but history is replete with instances when the sentiments have taken an abrupt turn and stocks have nosedived.
What are the current risk elements around us? “Spike in Covid-19 cases, inflationary risks that drive the Fed to accelerate their withdrawal from the bond buying program, interest rate movement, and relative impact on the rupee from these macro challenges will be key factors to watch for,” says Balakrishnan of Bank of America. Saraf of ICICI Securities, who is managing 30 IPOs in the pipeline worth a cumulative $10 billion, adds that if interest rates rise in the US, it could lead to FPI money outflow and a consequent short-term impact on the overall stock markets as debt returns would improve.
The Zomato moment has passed. Will history remember it as a happy milestone that changed the nature of India’s stock markets? Or, will it become a case study of how booming start-up valuations were finally rendered unviable by a ruthless stock market focused on earnings and profitability? The answer will come years later. By then, today’s investors would know if they had done the right thing or not.
Story: Ashish Rukhaiyar
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