On May 17, five companies filed their Draft Red Herring Prospectus (DRHP) for an Initial Public Offering (IPO) with the Securities and Exchange Board of India (SEBI). Between April and May, 20 companies submitted their DRHP, including 12 in May itself. The sudden increase in the number of prospectus filings with SEBI to list and raise funds on the stock market comes on the back of strengthening benchmarks, which are trading at unprecedented levels and are expected to continue to grow following a downturn. downward trend of coronavirus cases and a pickup in economic activity in the future.

In 2020-2021, up to 69 companies raised nearly Rs 75,000 crore through public issues, including IPOs. The figure is expected to more than double in 2021-2022, as the PFR alone is expected to absorb around Rs 70,000 crore in the market.

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While there is a big rush for IPOs if the markets continue to trade vigorously, investors should not be fooled by the number of public issues; they must be very careful in choosing a company available at a reasonable valuation.

What does the list look like?

Of the 20 companies that filed their DRHP with Sebi between April and May, six are from the healthcare industry and include names such as Glenmark Life Sciences, Windlas Biotech and Supriya Lifescience. While Zomato is on the list, the list also includes Devyani International which is one of the largest franchisees of Pizza Hut, KFC and Costa Coffee in India. The list includes Aditya Birla Sunlife AMC, Go Airlines (India) and Jana Small Finance Bank. Two chemical companies – Chemplast Sanmar and Clean Science and Technology – have also filed HRDs with Sebi to raise funds.

Deposits were high even in February and March, with 9 companies in February (the month that Sensex peaked) and 6 companies in March. The months of February and March saw high index levels and relatively lower cases of coronavirus cases. Several companies that filed their DRHP in February and March have already registered on the list or plan to launch their public offer in the coming weeks.

Source: Prime database

Why the rush now?

If a good income season, liquidity in the market, a drop in coronavirus cases and hopes of resuming vaccination and opening up the economy lead to a rise in benchmarks on the Bombay Stock Exchange and National Stock Exchange experts say companies and their investment bankers seek to capitalize on excess market liquidity, rising indices and good investor sentiment. This is one of the reasons for the rush. A bull market offers a high probability of listing earnings, which is not only a big draw for many IPO investors, but also leads companies to launch their issues.

A strong market means that a good company can achieve a higher valuation of its shares than in a moderate market environment. At the same time, even less good companies can see their problems cross a buoyant market.

Additionally, as market regulator SEBI has refined primary market standards, allowing issuers to launch IPOs and list their shares within a short period of time, companies are looking to take advantage of the uptrend. of the market.

“Companies want to file their offering document with SEBI and be ready to market their show when there is market stability and upside,” said Pranav Haldea, MD, Prime Database.

Some say the May rush is also due to the fact that if companies file their prospectuses with SEBI in mid-May, they will have to show the December quarter financial statements in the offering document.

In 2021, eight companies raised around Rs 12,720 crore through IPOs, and many have now lined up to be listed in the coming months.

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Does the money raised in an IPO go to the company?

While the equity offered by many companies is a mix of fresh and mostly offered for sale (OFS) equity by existing investors or promoters, market participants say that an IPO is a good way out of existing private equity. and venture capitalists who would have supported the company during the early years of its growth.

Data from Prime Database shows that over the past eight years, of the total issue amount of Rs 1.94 lakh crore that was raised by 160 IPOs, more than 75% (Rs 1.46 lakh crore) was raised through a sell offer. About Rs 48,000 crore was raised with new equity.

While the money raised by offering new shares in an IPO goes to the company for expansion and growth, the money raised through OFS goes to the investor who offers their capital for sale.

Experts say this is a sign of a mature capital market. “It’s not necessarily a bad thing. While PEs and VCs provide capital for entrepreneurs to grow their businesses, IPOs provide an exit for investors. It is important for them to come out, because then they can use them to finance new businesses. It’s a cycle and this trend is a sign of a mature capital market, ”said Haldea.

What to look for before investing?

It is important to carefully consider the business, its promoter, management and finances before investing. A good peer review is a must and investors should compare their growth and their multiple of PE (ratio of market price to earnings per share) before taking a call. If the company coming in for an IPO demands a higher valuation, investors may choose to skip the issue.

Many say retail investors should instead look for fundamentally strong companies in high-growth industries that have a proven track record. Investors can look for good listed companies available at decent valuations. Such companies are a better bet because much more detail is available on the promoter of the company, corporate governance practices, management and growth trajectory.

Why Should Investors Be Cautious?

Experts say promoters and investment bankers these days are leaving nothing on the table for retail investors as they seek the maximum possible valuation. In addition, high levels of oversubscription lead to the allocation of a few shares, which makes the whole exercise unnecessary.

“With equity markets looking to the future, a number of stocks are already discounting future growth and showing rapid price increases. An investor should be careful in such situations and should invest in fundamentally strong stocks rather than trying to make a quick buck just by posting gains in any IPO. In fact, look for quality IPOs that will increase your wealth, ”said Nirali Shah, head of equity research at Samco Securities.

There are also concerns about the assessment. Currently, markets appear to be in a long-term bullish phase, and high liquidity and the availability of cheap money / credit sources translates into expensive stock valuations. As interest rates are at their lowest and the Fed has no plans to raise rates in the near future, excess liquidity in the system is a key catalyst fueling the frenzy of the Initial Public Offering. In fact, according to Prime Database, the number of stocks with day one gains on the Indian stock market debuts was the highest in at least three years. Up to 18 of the 23 IPOs so far this year have seen day one gains – 78% of total shares listed in FY21.

The craze for public issues is certainly due to liquidity. But there is no doubt that in the future it will be the growth of the company and the economy that will drive the rally for some of these stocks, Shah said.

Some say retail investors should stay away from IPOs because they believe IPOs are one of the riskiest asset classes to invest in. its IPO.



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