Is Indian IPO market losing steam?

After a stellar run in the previous year, the IPO (Initial Public Offerings) market seemed to have lost some momentum, probably because market participants are worried about the risk attached to investing in new offerings, given that most of them are operating at a discount. In the calendar year 2022 (till August), as many as 51 companies raised ₹38,155 crore in capital through the primary market as compared to 55 companies with an issue size of ₹64,768 crore during the same period of last year. Total issuances in the calendar year 2021 (CY21) touched a record high of ₹1,21,680 crore (highest since CY17), which was in sync with the secondary market that witnessed a strong uptrend with the equity benchmark Sensex touching new heights of 61,765 on October 18, 2021.

A comparative study on the performance of the primary share market in the last two years showed that IPOs have given a return of 74% in CY21, whereas Sensex has risen by 20%. In CYTD22, IPOs delivered a return of 50% and Sensex increased by 1.6% during the same period, according to a report by Bank of Baroda.

In terms of mega IPOs, 33 companies with an issue size of more than ₹1,000 crore made debuts on domestic exchanges in CY21, in comparison to only 8 big ticket IPOs in the current year, including that of LIC of India, which is the largest in India's capital market history. However, most blockbuster IPOs have failed to meet market expectations amid growing concerns about companies’ high valuation, financial tightening and geo-political tensions. Out of 33 big ticket IPOs listed in CY21, 16 of them with an issue size of above ₹1,000 crore are operating at a discount. In CYTD22, LIC is the only mega IPO that is giving a negative return.

As per the report, in CY21 around 30% of companies listed at a premium of above 20% (highest since CY17) compared with 15% in CYTD22. “In CY21, nearly 50% of companies have received returns above 20% when the current price is compared with the issue price. In CYTD22, some companies have recouped earlier losses (seen at the time of comparison of listing price against the issue price), with the number of companies giving return above 20% rising to around 43%,” noted the report compiled by Dipanwita Mazumdar, economist at Bank of Baroda.

The report attributed multiple factors behind the slump in IPO markets such as global financial tightening, geopolitical tensions, a record rise in commodity prices, weakening of the rupee against the U.S. dollar, and higher inflation. Retail inflation has remained above the Reserve Bank’s (RBI’s) upper band of 6% for 8 consecutive months in a row, which prompted the central bank to raise the interest rate to ease inflationary pressure on the economy. The central bank, in its last policy meeting in August, hiked the interest rate for the third time since the beginning of the current financial year 2022-23 (FY23). It raised its policy repo rate by 50 bps to 5.40%, taking it to pre-pandemic levels, after hiking the rate by a cumulative of 90 bps in May and June.

“When we compare the last price (as of 07 Sep 2022) with the issue price of the IPOs, the share of companies operating at a discount rose considerably both for CY21 and CYTD22 to 40% and 39% from 24% and 18%, respectively, when issue price was compared to the listing price. This is in line with volatility in the domestic market on account of concerns of global growth slowdown and tightening financial conditions,” the report highlighted.

However, on the positive side, some of the companies are recouping their earlier loss such as Delhivery and Vedant Fashions. If we compare the latest price with the issue price for CY22 (till August), the share of companies receiving negative return rose to 39%, but 43% of them are earning return above 20%, which is a positive thing as well. Out of 8 big ticket IPOs till date, only LIC is giving negative return.