Dalal Street, India’s Wall Street, currently seems to be obsessed with a flood of new initial public offerings (IPOs) that are reshaping India’s financial markets. Cashing in on the abundant liquidity, as many as 40 companies so far have already floated their primary sale this year, making 2021 one of the best years for IPOs investments. Funds raised through IPOs have increased by almost 2.2 times compared to the previous year. As per Goldman Sachs figures, Indian start-ups have already raised $10 bn through IPOs since beginning of 2021, surpassing full-year IPO issuance in the past 3 years.
Robust future IPO pipeline
Amid expectations of strong investor demand for the new economy IPOs, another 40+ companies will be seeking regulator’s approval for rolling out IPOs, as per merchant banking sources.
Going forward, the IPO boom is expected to extend over the next 2-3 years, given the rapid pace of listing announcements year-to-date, according to Goldman Sachs (GS).
The American investment bank sees as many as 150 private firms potentially listing on the Indian market over the next 36 months, that will help add $400 bn to the overall market capitalisation over the same period. In addition to that, by 2024, India could surpass the UK as the world’s 5th largest financial market by capitalization (from 7th largest currently). Based on GS’s calculations, the total Indian market capitalization, now at $3.5 tn, is estimated to cross the $5 tn mark by 2024.
Not only that, but the addition of new listings could also result in higher global market cap and index weighting for India and increase the aggregate revenues of the MSCI India index by 20%, based on GS’ framework.
New economy frenzy IPOs
Commanded by strong investor sentiments, a large chunk of upcoming IPOs would be garnered by technology-driven companies. Market experts are anticipating hectic fundraising through IPOs from the technology sector over the next few months. More and more new-age tech companies are coming out with their primary share-sales and fuelling India’s IPO market, which has been earlier historically focused on ‘old-economy’ sectors like energy and finance.
Goldman analysts said that several ‘new economy’ unicorns are heading for IPOs in India and the share sales pipeline should remain robust in the next 12-24 months. New economy sectors are the high-growth industries, which are underpinned by the latest technologies. According to the GS experts, the new economy sector’s exposure could rise from 5% to 12% (at 50% float) and 16% (full inclusion) over the same period.
“Looking forward, we think Indian equity indices could see a larger representation of the new-economy sectors over the next 2-3 years as the large digital IPOs get included in the index,” bank’s experts said in a recent report.
After food delivery firm Zomato’s IPO, other technology start-ups that announced plans to go public include payments giant Paytm, ride-hailing start-up Ola and e-commerce firm Flipkart.
Goldman predicted that these new-age unicorns could potentially transform Indian capital markets and stock indexes over the next few years. As per GS data, at least 67 private start-ups in India fit the definition of a unicorn.
“The number of such ‘unicorns’, which are companies having a valuation of $1 bn and above, has surged in India in recent years, enabled by the rise of the internet ecosystem, availability of private capital and favourable regulatory environment,” the bank added.
In 2021, 27 Indian start-ups joined the unicorn list.
What’s driving the rush to India’s IPOs
These new aged unicorns have garnered excitement in the IPO market due to various factors. The recent IPOs commanded strong listing gains, with subscriptions figures hitting pricey multiples. IPOs have received a very good response from investors, despite concerns on stretched valuations and inflation. ET Intelligence Group Database showed 34, or nearly 90% of the 38 companies that have listed so far in 2021, are trading above their final offer prices.
Goldman analysts said that IPOs in India have been listed at a premium of 10-15% on average over the offer price. Where the average listing premium since 2004 is 15%, the 10-year average is 11%.
Furthermore, the recent IPOs have also been driven by continued foreign portfolio investments and domestic flows from banks and financial institutions in the markets.
According to data provided by the New Delhi-based Prime Database, banks steering IPO offerings have raked in record fees of almost $189 m, more than double the amount they earned during the previous peak in 2017. This recent surge comes on the back of a faster-than-expected economic recovery in India despite the haunting effects of the second wave of pandemic.
In the meanwhile, issuers have accelerated their listing plans to enter the primary issue market, in order to benefit from the buoyant stock market in 2021. India’s benchmark index S&P BSE Sensex was Asia’s best performing major index this year, trading 26% higher since January.
Lastly, enthusiasm among retail investors has especially been high for primary issues, who have increased participation in the stock market in the past year. This was fuelled by improved trading infrastructure and faster online payment systems.