As the Tata Technologies initial public offering (IPO) closes for subscription today, the marquee Tata issue after almost a decade, is trading in the grey market at a premium of over 80%. Such a huge premium has led analysts to speculate whether the IPO from the Tata stable would double on the listing day. Whether it doubles or not, the revival in the IPO mart this year after almost two lacklustre years, following the Ukraine war and inflation crisis, shows the oncoming boom in maiden issues.
In the third quarter of 2023, the mainboard IPOs saw a substantial uptick with 21 offerings raising a total of $1.77 billion. This marks a remarkable 3.7x increase in the amount raised and a 4.2x increase in the number of deals, according to an EY report.
The small and medium-sized enterprise (SME) IPO market also witnessed considerable success, generating $165.7 million through 48 IPOs in the same quarter. E&Y predicts that this momentum will persist into the future.
This has led to the Indian primary market gaining global recognition as the most vibrant one.
The surge in IPO activity is attributed to the eagerness of companies to tap into capital markets before or after the Lok Sabha elections, coupled with robust economic activity and positive sentiments from both domestic and foreign investors toward India and this momentum is likely to continue well into the second half of 2024.
The pipeline for upcoming IPOs appears robust, with more than 25 companies filing their Draft Red Herring Prospectuses (DRHPs) in Q3, indicating a strong intent to raise funds in the coming quarters.
The optimism in the market is fuelled by various factors, including the diminishing chances of a US recession, the Federal Reserve’s decision to pause interest rate hikes, and concerns about inflation. Companies are keen on filing for IPOs before the 2024 Indian elections, with a surge in demand compared to 2022.
The IPOs launched this year have also rewarded investors with positive listing gains, fuelling the bullish sentiment. The average listing gain increased to 29.4% in the first half of 2022-23. Notable performers include Ideaforge with a 93% return, Utkarsh Small Finance Bank with a 92% return, and Netweb Technologies with an 82% return.
In tandem with the rise in primary market fund raises August 2023 witnessed a substantial $5.2 billion in private equity (PE) and venture capital (VC) investments, marking a 127% increase compared to August 2022 and an 18% increase from July 2023. PE/VC exits reached $4.3 billion across 37 deals, representing a 35% year-over-year increase in value.
New-age firms back with a bang
From the lull of the last 12-16 months, which saw macroeconomic concerns stalling the market prospects and valuations of marquee startup IPOs such as Nykaa, Paytm and PolicyBazaar sinking, around 40 new-age firms going public or being IPO-ready by fiscal year 2025. SaaS, B2C product companies, and FinTech are identified as promising categories, given their substantial revenues, sustainable growth, strong EBITDA, and defensible business models.
Even the year-to-date (YTD) performance of key tech stocks like Zomato, Paytm, Policybazaar, Nazara, and Delhivery has shown significant gains, ranging from 15% to 60%. This recovery compensates for the value erosion witnessed over the past 18 months.
In 2022, only three tech startups managed to get listed, while several others, including ixigo, OYO, Droom, Snapdeal, PharmEasy, and MobiKwik, delayed or withdrew their IPOs.
However, in 2023, the IPO performance has been mixed bag with the first startup to list, ideaForge gaining an overwhelming investor response with a 94% premium to the issue price. The success of ideaForge highlighted a growing appetite for new-age stocks in the public markets, potentially influencing other startups contemplating their IPO plans.
While the second IPO Mamaearth sank at listing earlier in November, it is now up following favourable brokerage reports.
Looking back, the Indian tech startup IPO scene witnessed a landmark year in 2021, with 11 public listings. However, the subsequent 12-16 months saw significant value erosion due to a macroeconomic slowdown, impacting tech companies globally.
The catalysts
The focus on profitability, prompted by a prolonged funding winter for Indian startups, has led to this shift in the IPO landscape. According to consultancy Redseer’s report a trend of gradual recovery, with a projected estimate of 90 new-age companies getting listed by FY28.
Factors such as a booming tech ecosystem, strong investor interest, rapid digitization, supportive policies, and global market opportunities contribute to this positive outlook.
Firstly, India’s tech contribution to public market capitalization currently stands at a mere 1%, a stark contrast to the approximately 25% in the USA. This suggests a substantial opportunity for significant value creation within the Indian tech space.
Secondly, India boasts a remarkable count of 100 unicorns and over 150 ‘soonicorns,’ indicating a robust pool of tech companies that form a strong pipeline for startups with IPO potential.
SEBI, the regulatory authority, has implemented a series of amendments aimed at bolstering transparency and practices in the capital markets. These changes encompass alterations in issue pricing, the disclosure of Key Performance Indicators, the introduction of pre-filing of draft offer documents (confidential filing), the establishment of the Social Stock Exchange, modifications in monitoring agency functions, and a refined definition of SMP to enhance inclusivity.
Foreign Institutional Investors (FIIs) are demonstrating sustained inflows into India, drawn by the nation’s stable macroeconomic outlook, political stability, and impressive financial results. All this points to a bullish IPO season over the next year.
Readers, We have also launched our WhatsApp channel. Join us for the most trending and relevant news which matters to the CFO community.
(Editor’s Note is a column written by Amol Dethe, Editor, ET CFO. Click here to read more of his articles exploring several buzzing topics.)
