The year 2020 was one of the toughest and unforgettable years for everyone around the world. The Covid-19 pandemic set off waves of bad news that we obviously want to forget 2020, but then the year had a brighter side too. Despite this roller coaster ride, the stock market performed handsomely. Public listed companies paid a whopping amount through dividend or bonuses. Merger and acquisition deals and raising of equity worth billions of dollars made headlines regularly in the second half of the year. Inflows in foreign direct investment rose and the nation’s foreign reserves hit an all-time high were some of the good news that we will remember about this year.
Shares of companies that went public this year have earned a good return till date over their issue price. From a multi-year low of 25,981 points that were recorded on 23 March 2020 after the Sensex crashed by a mind numbing 3,935 points on that dreadful day. The benchmark index bounced back with vengeance and embarked an all-time high of 46,000 points on 3 December 2020. In the same way, last year on 31 December 2019, the broader Nifty 50 ended at 12,168.45 points. On 23 March 2020, it nosedived and settled at just 7,610.25 points. But then after the government boosted the market sentiments with stimulus packages to make the businesses easier in the country, Nifty 50 rallied towards the north and on 24 December 2020, it ended at 13,749.25 points. This year’s crisis has been an extraordinary experience for investors as it dragged the country’s economy to significant lows.
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IPO is a process through which a private company or corporation can become public by selling a portion of its stake to the investors.
Bull’s Eye
As we are ringing into a new year, let’s hope things will change in 2021! No matter what may be the reason, nothing can get an investor’s heart racing more than these three letters Initial Public Offering IPO. Yes, you heard it right, the initial public offering is an epicentre of a publicly-traded company. The IPO market seems to be piping hot in 2020 compared to the same time previous year. Despite the pandemic and the economic slowdown, IPOs worth Rs 179.8 billion have already knocked out the market in the past 10 months, compared to Rs 126.87 billion worth IPO in 2019. Aiming to capture similar vibes, the initial public offer market has planned a mega start in the new year by queuing up more than 30 IPOs worth over Rs 30,000 crore.
So, let’s understand IPO better before moving ahead. Why companies are pipelining their IPOs every year? IPO is a process through which a private company or corporation can become public by selling a portion of its stake to the investors. An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy trading of the existing assets, to raise capital for the future or to monetize the investments made by existing stakeholders. The institutional investors, high net worth individuals, and the public can access the details of the first sale of shares in the prospectus. The prospectus is a document that lists the details of the proposed offerings. Once the IPO is done, the shares of the firm are listed and can be traded freely in the open market. The stock exchange imposes a minimum free float on the shares both in absolute terms and as a ratio of the total share capital.
Mega IPO Year
The IPO market or the primary market is gearing up for the ‘Great Gatsby’ debut with Kalyan Jewellers, Indigo Paints, Stove Kraft (Pigeon Appliances), Samhi Hotels, Apeejay Surrendra Park Hotels, Indian Railways Finance Corporation, ESAF Small Finance Bank, Studds Accessories, Nureca, Mrs Bectors Food, food delivery app unicorn Zomato and others. Stimulated by a stable rise in the key market indices amid low volatility, companies are in a jiffy to tap the primary market.
Also, with an expectation to start the distribution of the Covid-19 vaccines and the key companies involved in the process till mid-2021, the market is optimistic for the year 2021. A strong market means a good company can get a good valuation for its shares. So far, the IPO market has been good, it has raised over Rs 25,000 crore. And the street is gung-ho with the line-up of these IPOs in the coming months.
Most of these IPOs are expected to take off in the first half of the calendar year 2021, which will also help in ending the current fiscal with good numbers. If things went well, it is also possible that the government might launch the Life Insurance Corporation (LIC) IPO, which is considered to be the mother of all the IPOs. The launch of the LIC IPO will be a record year for the IPOs that will never probably be broken. As LIC will command a valuation that will run into trillions of rupees.
The market regulator Securities and Exchange Board of India (SEBI) had fine-tuned the primary market norms amid the ongoing pandemic, which includes enabling the issuers to float an IPO and list shares in a short period, thus cutting costs. The regulator has also provided several temporary relaxations and one-time measures, including extending the validity of observations on draft offer documents of companies, reducing the minimum subscription amount in rights issues by companies and increasing permissible issue size variations from 20 per cent to 50 per cent, to name a few. SEBI’s observations are necessary for any company to launch public issues like initial public offer, follow-on public offer, and rights issue. The success of IPOs has prompted many potential issuers to look at the primary market for fund raising and listing as investor sentiment is positive.
Bigger the Better
Kalyan Jewellers India, which is considered to be the biggest among the IPO candidates, has received capital markets regulator SEBI’s go ahead to raise an estimated Rs 1,750 crore through an initial share-sale. Promoter T S Kalyanaraman is expected to offload shares worth up to Rs 250 crore, while Highdell Investment would sell up to Rs 500 crore worth of shares through the OFS route. The Kerala-based Kalyan Jewellers designs, manufactures and sells a wide range of gold, studded and other jewellery products.
On the other hand, US venture capital firm Sequoia Capital-backed Indigo Paints, which is yet another potential IPO candidate, is looking to launch its IPO in January 2021. The Indigo Paints IPO is expected to raise Rs 1,000 crore from the market. Indigo Paints manufactures a complete range of decorative paints, including emulsions, enamels, wood coatings, distempers, primers, putties and cement paints. The company claims to be the first to manufacture and introduce certain differentiated products in the decorative paints market in India, which include metallic emulsions, dirt-proof and water-resistant exterior laminate. Sequoia has invested nearly Rs 140 Crore in Indigo Paints since 2015 and holds a 39.34 per cent stake in the company.
How did the IPOs Perform?
IPO activity in 2019 saw the lowest fund-raising since 2015, with 16 companies raising around Rs 12,365 crore, a data from primary market tracker Prime Database and regulatory filings shows. The previous year had seen 24 companies raising Rs 30,959 crore through IPOs, the same data shows. Of the 13 IPOs, which got listed, only seven gave a return of over 10 per cent. The lower deal activity in 2019 was largely a result of a liquidity crisis unleashed by defaults by the Infrastructure Leasing and Financial Services (IL&FS) group, an overall slowdown in the Indian economy, and global macro headwinds, such as the US-China trade war. These made investors jittery, prompting them to choose high-quality listed names instead of new names looking to hit the markets.
On the other hand, after a lull year in 2019, the year 2020 started out badly for the IPO markets due to Covid-19. But after a recovery in June, IPOs delivered record-breaking performance one after the other. Recovery started in around mid-June after the government announced stimulus packages to make it easier for the country to do business and relaxed Foreign Direct Investment (FDI) norms. Since July, 13 major companies launched initial public offerings to raise funds. Three of these were subscribed more than 150 times as the benchmark indices surged to record level.
However, biting the dust from the previous quarters and due to the Covid-19 pandemic, the IPO market was slow to recuperate in the first quarter of 2020 i.e., between April and June. Taking things cautiously, the companies that had withdrawn or pushed their IPOs returned to the market. In the second quarter, 46 Indian firms listed on the bourse, compared to 27 firms the previous year. An IIFL Securities report shows that the IPO collections till September-end were almost twice than that of the previous year, which could be the best year on record in the last decade, removing the seven insurance companies that went public in 2017. 16 companies came out with their IPOs during 2020 against 17 the previous year but the fund raising in 2020 was much higher at more than Rs 31,000 crore compared to Rs 17,433 crore in 2019.
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Due to the Covid-19 pandemic, the IPO market was slow to recuperate in the first quarter of 2020 i.e., between April and June.
Outperforming Sectors
According to a data by PGA Labs, even though the pandemic took a toll on the IPO market with a significant impact, new listings raised approximately $3.5 billion this year, compared to $1.74 billion in the year-ago comparable period. The sectors that outperformed in the IPO markets this year included technology and healthcare. Route Mobile, Happiest Minds Technologies, Rossari Biotech and Gland Pharma saw solid IPOs and debuts and was among the biggest IPOs overall in the year 2020.
Road Ahead
A latest report of Fitch Ratings, it has predicted that the outlook for India is brighter, as a result of an expected rollout of various vaccines in 2021. The country may regain the fastest growing economy tag in 2021, growing faster than most major economies, including developed markets, European nations and emerging markets. We can see the light at the end of the tunnel as researches are being done rapidly, however we cannot be sure about any of the prediction amid rising Covid-19 cases.
If the current trends are any indication, some sectors will benefit a lot. Certainly, the stocks which saw a dip will be on the radar list of the investors. It is wise if investors play strategically and monitor changes that will impact their present portfolio given the post-Covid-19 scenario impacting certain sectors. Covid-19 has changed the investment styles of people the world over and the evolving behaviour will continue to influence the market for a long time. The IPO activity is not only likely to be dominated by resilient sectors like new-age technology, healthcare and consumers in 2021, but also from recovering sectors like hospitality, commercial real estate investment trusts and banking financial services and insurance (BFSI).
