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India has had just a handful of IPOs this year, a marked contrast to the fevered activity in 2021. (Source photos by Kosaku Mimura and Reuters)
Market Spotlight

India's IPO market revives, but caution is the watchword

Economic concerns and stock market swings bring an end to investors' ebullience

SAYAN CHAKRABORTY, Nikkei staff writer | India

BANGALURU -- Bankers and venture capitalists haven't immediately been rejoicing at the three initial public offerings launched on Indian bourses in late March. The IPOs ended a drought of almost two months after apparel maker Vedant Fashions' 31.5 billion rupee ($415.4 million) public flotation in early February, but combined they totaled a modest 3.9 billion rupees. Last year's ebullience in India's primary markets has given way to caution.

"The small IPOs will keep coming," said Deepak Jasani, head of research at HDFC Securities, adding that it may take at least a couple of large IPOs to list at a premium to the offer price and "stay at those levels for at least seven days" to encourage investors, both institutional and retail, to warm up to the primary markets.

It seems like a tough ask amid a broader slowdown in the global economy, exacerbated by Russia's invasion of Ukraine.

The ripple effects of a sharp spike in crude oil prices are being felt across every industry. Meanwhile, concern about inflation has prodded the U.S. Federal Reserve to signal sharp rises in U.S. interest rates, one of the reasons that foreign institutional investors have been net sellers of Indian equities since October. They bought more than they sold since the beginning of April.

That the Indian markets have been choppy -- India's benchmark stock index slipped to the year's low in the first week of March before clawing its way up -- isn't helping IPO-bound companies either.

"Promoters are not very sure if they will get the valuations that they think they should get in the current market situation," said HDFC's Jasani. "I don't think investors are going to take a very big exposure to equities until the U.S. Federal Reserve's meeting in May."

The IPO slowdown is in sharp contrast to a record run in India's primary market in 2021, when 63 companies raised 1.18 trillion rupees. That was a sea change from the previous five years: Companies raised 1.63 trillion rupees in 117 IPOs from 2016 to 2020. India's benchmark stock index also had an unparalleled run among its Asian peers last year, posting a 19% surge, while Japan's Nikkei 225 rose 2.3%, the Shanghai Composite was up 1.3%, the Singapore Stock Exchange rose 4.34% and Hong Kong's Hang Seng Index dropped 16%.

Numerous companies this year have chosen to park their public offerings until the markets stabilize. According to Prime Database, a capital markets research firm, at least 55 companies with plans to raise a combined 1.4 trillion rupees are yet to launch their IPOs despite receiving the green light from regulators. Among those waiting it out are logistics startup Delhivery, online pharmacy Pharmeasy, travel startup Ixigo, wearables maker boAt, drugmaker Emcure, non-banking financial company Five Star Business Finance and Penna Cements.

Investors "aren't sure of the right price amid this kind of volatility," said the founder of one of the companies that has delayed its IPO, speaking on condition of anonymity.

"Investors don't want to buy and then undergo a markdown in the next three months, which is possible given the market conditions," the founder said, alluding to the rapid turn in fortune of the publicly traded technology stocks. Shares of financial services provider Paytm, which completed India's biggest IPO last year, have slumped 70% from its offer price of 2,150 rupees. Madhur Deora, the company's chief financial officer, had claimed Paytm could have priced its IPO higher. Stocks of Zomato, Policybazaar and Nykaa are also trading below their listing price.

"Investors are rebalancing their portfolios, and let's not forget that a lot of well-known stocks were available on the cheap amid the recent slump in the markets," said the founder of a company that has filed its IPO prospectus with the Securities and Exchange Board of India (SEBI). "I think things will pick up around June, particularly after Life Insurance Corporation of India's (LIC) IPO."

LIC is indeed an elephant in the room. The public offering of the state-run insurance company, India's largest, will dwarf that of Paytm. The Indian government is banking on the targeted 650 billion rupees in share sale proceeds to fund public spending that it hopes will rejuvenate India's economy and achieve growth of 8% to 8.5% in the financial year ending March 31, 2023.

The IPO is also crucial to achieving the government's still-lofty divestment goals. It had set a target of 1.75 trillion rupees in proceeds from privatizations for fiscal 2022 but slashed its goal in February to 780 billion rupees.

The government is yet to announce a date for the LIC offering, while media reports suggest that the stock could list on the bourses in May.

"The LIC IPO is going to suck out a lot of liquidity from the market," said Abhishek Jain, head of research at Arihant Capital.

The slowdown in primary markets has taken a toll on exit plans of venture capital and private equity funds that had pinned their hopes on IPOs to clock handsome returns.

Of the 2.9 trillion rupees raised through public offers since 2016, 71% was offer for sale (OFS), where existing investors and promoters sold their stake, according to Prime Database.

"It's a setback for investors looking for an opportunistic exit in the current IPO cycle, because you don't really know if the markets will revive to the 2021 levels," said an investment banker on condition of anonymity. Some existing investors will opt to sell shares privately instead, the banker predicted.

An unpredictable market is not the only challenge facing IPO-bound companies. Regulators, wary of the impact of stock market volatility on retail investors, are advocating tighter scrutiny of companies seeking to list. SEBI has proposed that unprofitable companies eyeing a public offer should disclose the parameters that formed the basis of their valuation. It had earlier restricted investors who own over 20% of a company from selling more than half their shares through OFS in an IPO, while those with less than 20% cannot sell more than one-tenth of their investment.

SEBI is yet to approve IPO applications from at least 40 companies, including hospitality startup Oyo and e-commerce company Snapdeal.

However, companies aren't giving up on their listing dreams. Financial service providers Navi Technologies, Kfin Technologies, EbixCash and Aadhar Housing Finance as well as jeweler Joyalukkas filed their IPO prospectuses in March, each seeking to raise north of 20 billion rupees. Startups such as food delivery firm Swiggy and baby products retailer Firstcry are readying billion-dollar IPOs.

"The markets aren't going to be dull forever," said the banker cited above. "This too shall pass."

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