India IPO market to remain robust in CY2024

India is witnessing an unprecedented shift in the history of its capital markets. Indian capital markets, especially the Initial Public Offering or the IPO markets, till a few years back, have been very sporadic. There used to be “windows of opportunity” which would be a matter of a few months in a 2-3 year scenario which would be conducive for an IPO to happen. Typically, IPOs happen when there is alignment of a few factors, including: a) the company is ready for an IPO with its scaled-up numbers, growth and profitability, internal processes and a management team ready to take on the fiduciary responsibility of public funds b) the secondary markets being robust c) Investors willing to participate in the IPO at their perceived reasonable valuations. The alignment of these factors at the same time was infrequent lending to the sporadicity of the IPO markets. Part of the reason has also been that the Indian capital markets have been dependent on foreign inflows, which tend to have high degrees of variations of inflows and outflows based on multiple global macroeconomic factors.

The scenario is undergoing a massive change due to the following factors:

a) Rise of the domestic capital

A marked change in the past few years has been the rise in the domestic capital, with mutual funds gaining prominence. The Indian mutual fund industry, which managed about INR 7 trillion in total in 2013, with a dominant component of debt of about Rs 5 trillion, has come a long way to managing over Rs 50 lakh crore in total by the end of 2023, with over half of that in Equity and Equity related schemes.

b) Flourishing Indian entrepreneurship

India has been seeing a steady surge of solid entrepreneurship with some of beautiful businesses scaling up with good growth and profitability. These are disruptive businesses with significant moats around them catering to a large addressable market with efficient execution. A large of part of these business have also started coming in from the Tier 2, Tier 3 cities of India with hungry for growth founder managers. High quality growth oriented and profitable companies tend to attract investors.

c) Improving governance

The governance angle of the companies in general in India has delightfully changed for the better and that too significantly, in the recent years. From the times of lackadaisical governance attitude and raising reckless amounts of debt which had bloated the non-performing assets of the banks, to a regime, where creating value for the business and its stakeholders over self with the controlled levels of debt in the corporate finance mix has been making the corporate India more affable to investors.

d) Promoters looking at IPOs as a milestone in their value creation journey and not an end in itself

From a position of maxing out the valuation at the time of IPO, the promoters or the founders are increasingly looking at IPOs as a milestone in their journey of value creation. Listing gives immense advantages to companies – visibility, ability to attract talent, currency for acquisitions, ability to raise future funds, among other things. More importantly, a wealth creation opportunity to the stakeholders is provided by listing with a potential of long-term compounding. With this, the mindset of the promoters is to leave returns on the table for the IPO investors, which is music to the ears of the investors.

e) Diligent institutional investors

As the mutual funds industry gains size and prominence, the investors too internally are becoming more and more process oriented and extremely diligent to study the businesses well before they put their neck out while investing. This phenomenon is very important to provide structure and a strong spine to the health of the capital markets.

With these factors in play, the IPO market is becoming more of a consistent source of raising of equity funds with the “window of opportunity” to get an IPO done giving way to its reverse “windows of patience” to accommodate for any volatility in the stock markets or expected performance improvements in the business, in a generally conducive IPO market environment.

We will also see a good number of newage companies tapping the capital markets for their IPO with their re-modelled business attuned to profitable growth. The calendar year 2023 saw a fund raise of about Rs 50,000 crore through IPOs. Any upsets in the election results and any adverse global factors notwithstanding, I expect the Indian IPO market to remain robust and surpass that number to over Rs 70,000 crore in the calendar year 2024, which is a number that emanates from the current pipeline of IPOs line up.

Views are personal. The author is Head of Investment Banking, Managing Director, Equirus Capital.