India Sees Record-setting 240 IPOs in 2023: What’s Driving the Rush and How Sustainable Is It?
Source and citation: Details and quotes from an ET Bureau article published on December 29th, 2023, analyzing India’s 2023 IPO boom.
Analysis for a Layman
In 2023, India has experienced an unprecedented surge in Initial Public Offerings (IPOs), with over 240 companies launching IPOs to raise nearly $7.1 billion. This IPO boom, driven by various factors, has placed India second globally, just behind China, in terms of IPO activity. This surge represents a 55% increase in deal volume compared to the previous year.
Several factors are contributing to this IPO frenzy. First, India’s domestic stock market has been performing exceptionally well, characterized by a bullish trend, which has generated confidence among both companies and investors. Additionally, there is an abundance of liquidity in the market, and retail investors are displaying a strong appetite for risk.
The performance of recent IPOs, with shares often soaring in the aftermarket, has further fueled speculative interest. Companies from various sectors, including renewable energy, technology startups, and consumer brands, have taken advantage of these favorable market conditions to raise funds for growth.
However, this IPO frenzy also carries the risk of overheating and a potential correction if market sentiment reverses. It’s important to note that India’s share of the global IPO market is still relatively small at around 5%, indicating room for further growth. Nonetheless, prudent regulation is necessary to prevent reckless participation.
Impact on Retail Investors
For retail investors, the surge in IPOs presents both opportunities and risks. The strong performance of recent IPOs in 2023 may tempt inexperienced investors seeking quick gains. However, it’s crucial for investors to conduct thorough research into a company’s fundamentals before participating in an IPO.
Speculative investing based solely on momentum can lead to significant losses. Retail investors should avoid overextending themselves or taking on excessive leverage to invest in overpriced IPOs. Instead, they should consider IPOs as a complementary part of their portfolio and not gamble with their funds.
On the positive side, the increasing number of IPOs reflects the growth of India’s startup and venture capital ecosystem. This provides opportunities to invest in emerging sectors such as electric mobility, fintech, health tech, and e-commerce. Retail investors can gain diversified exposure to these high-growth areas by carefully selecting IPOs.
Investing in companies aligned with long-term structural shifts, such as renewable energy, data centers, and digital payments, can help mitigate risks associated with speculative IPOs. Examining indicative price bands set by merchant bankers can also help assess potential upside and downside relative to anchor investor interest.
In summary, retail investors should view IPO investing as a complementary strategy rather than a speculative gamble. While the primary market offers access to early-stage growth stories, it’s important to maintain balance, selectivity, and a long-term perspective.
Impact on Industries
The booming IPO market benefits various industries in India. Companies from high-growth sectors like financial services, infrastructure, information technology, renewables, specialty chemicals, logistics, and e-commerce have access to lower-cost capital for expansion.
However, going public also comes with challenges. Listed companies face pressure to meet quarterly performance expectations, with markets often less patient than private equity and venture capital investors. This short-term focus can influence executive decision-making, potentially affecting long-term strategies.
Publicly listed companies are subject to increased scrutiny regarding governance, disclosures, and practices from media, analysts, and policymakers. While transparency enhances accountability, it also adds compliance burdens that private unicorns may not have encountered.
The IPO market provides opportunities for emerging companies to challenge established giants, particularly in sectors dominated by a few major players and subsidized public sector banks. This infusion of risk capital through public markets can drive innovation and competition.
However, companies that rely on continuous cash burn strategies may face existential threats if access to follow-on capital tightens during market corrections. Therefore, quality should take precedence over quantity when considering IPOs.
Overall, the IPO boom enhances access to capital, productivity, efficiency, and diversity across India’s economic sectors. This contributes to competitiveness and long-term resilience.
Long Term Benefits
The accelerating momentum of IPOs in India reflects the maturation of the country’s capital markets ecosystem. Over the past 25 years, regulators have focused on enhancing participation diversity, financial inclusion, risk transparency, and investor protection. These efforts strengthen the foundation for entrepreneurship.
India has transitioned from relying heavily on foreign funds and domestic banks to becoming a hub for venture capital funding in sectors such as technology, biotech, and consumer-facing industries. Public listings represent the next phase, allowing early backers to exit and companies to gain visibility and proprietary capital.
India’s open democratic market, unlike China’s, attracts global attention due to uncertainties related to trade barriers, geopolitics, and population dynamics. Focus on areas like green economy leadership and digital public goods positions India favorably.
With prudent regulation and supervision, India can aspire to emulate the success of U.S. capital markets, which have commercialized disruptive innovation in sectors like automobiles, technology, pharmaceuticals, and smartphones. Improved access to risk capital is a crucial enabler of this transformation.
Short Term Benefits
In the short term, the surge in IPOs in 2023 allows companies to access capital at lower costs, as enthusiastic investors oversubscribe to offerings at rich valuations. This provides companies with extended runways for growth, even for historically unprofitable ventures.
Furthermore, the strong aftermarket performance of IPOs, coupled with significant hype and media attention, allows companies to gain a competitive edge in their respective sectors. Companies going public can benefit from this surge in visibility.
However, prudent investors should exercise caution when extrapolating short-term market conditions too far into the future. Global risk factors or domestic events, such as elections, can quickly shift investor sentiment from greed to fear.
Nonetheless, India’s underlying attractiveness, driven by demographics and growing services export competitiveness, remains robust over the long term. Taking advantage of the current IPO frenzy to enhance competitive positioning is a strategic move, as such funding flexibility is unlikely to last indefinitely. Both dynamic entrepreneurs and selective retail investors can find tactical opportunities to allocate measured exposure for long-term wealth creation.
Companies Impacted by India’s Robust IPO Market in 2023
Indian Companies Potentially Gaining:
- Newly Listed Companies: Companies that successfully completed IPOs in 2023, particularly those with strong performance and high returns like IREDA, Cyient DLM, and Netweb Technologies, could see continued positive sentiment and potentially higher valuations.
- Investment Banks and Brokerages: Increased IPO activity and strong domestic investor participation benefit companies involved in IPO execution, underwriting, and distribution. ICICI Securities (ICICISECA:NS), Axis Capital (AXISBANK:NS), and Kotak Mahindra Securities (KOTAKSEC:NS) could see higher fee income from these activities.
- Private Equity & Venture Capital Firms: Successful exits through IPOs for portfolio companies could boost the reputations and fundraising potential of Indian PE and VC firms like Sequoia Capital India, Kalaari Capital, and Blume Ventures.
- Companies in High-Demand Sectors: Sectors experiencing strong IPO interest, like renewable energy (IREDA) and technology (Cyient DLM, Netweb Technologies), could attract further investments and mergers and acquisitions (M&A) activity. This could benefit existing players like Tata Power (TATAPOWER:NS), Adani Green (ADANIGREEN:NS), and Infosys (INFY:NS).
Indian Companies Potentially Losing:
- Unlisted Companies: With increased capital allocation towards IPOs, some unlisted companies, especially those in traditional sectors, might face challenges raising funds through private placements or debt.
- Late-Stage Startups: Increased focus on mature companies with proven track records for IPOs could make it harder for early-stage startups to secure funding.
Global Companies Potentially Gaining:
- Global Investment Firms with India Exposure: Increased IPO activity and potential for attractive returns could attract foreign investments into Indian equities and IPOs. Firms like BlackRock (BLK) and Vanguard (VANGUARD) could benefit from this inflow.
- Global Investment Banks: International banks with strong IPO execution capabilities could partner with Indian companies and domestic banks to tap into the growing IPO market.
Global Companies Potentially Losing:
- Global IPO Markets in Other Emerging Economies: India’s strong IPO performance might draw investor interest away from other emerging markets, potentially impacting IPO activity and valuations in those regions.
Market Sentiment:
- Positive for the Indian IPO market and related sectors, with continued optimism driven by strong domestic demand and successful exits.
- Potential for increased scrutiny and focus on quality and transparency in IPO processes.
- Increased interest in high-growth sectors and companies with proven track records.
Note: This analysis is based on the provided information and may not be exhaustive. Other companies could be impacted depending on their specific industry, business model, and involvement in the IPO market. The actual impact will depend on the evolution of market conditions, investor sentiment, and regulatory developments.