Primary High

After the encouraging return delivered by 2016 IPOs, the 2017 pipeline is already chock-a-block

2017 could be yet another marquee year for IPOs as some well-known names across telecom, financial services, retail and healthcare are looking to list. Among the companies (some of them already armed with a SEBI approval) coming to tap the primary market include India’s premier stock exchanges, National Stock Exchange and Bombay Stock Exchange and the largest depository participant, Central Depository Services (CDSL) which has already filed its prospectus, D-Mart’s parent company Avenue Supermarts (Rs.1,870 crore), and Aster DM Healthcare (Rs.1,600 crore). While 2016 turned out to be a good year for IPOs both in terms of funds raised and performance, will macro-economic and political factors play spoilsport and scuttle things in 2017 or will the pipeline of quality IPOs keep these concerns at bay and find ample buyers? 

“If you are asking me to launch an IPO in the next ten days, I will be cautious. I would like to watch how FIIs allocations pan out for India, budget guidance and situation after demonetisation in terms of how business picks up,” says Girish Nadkarni, managing director, investment banking, Motilal Oswal Financial Services. The year 2017 began with a cautious note as there are increasing concerns on the impact of demonetisation on companies’ growth and earnings. With FIIs looking to exit emerging markets like India following the US rate hike and the uncertainty surrounding the domestic environment, markets have seen a huge sell-off in recent months. In the last three months alone, FIIs have sold close to Rs.35,000 crore of equities. In 2016, they have sold close to Rs.8,800 crore worth of equities on a net basis. 

But sell-offs don’t ring the alarm bells for the primary market as they previously used to. “IPO market is no longer dependent on a single segment for investments. FIIs are important, but that’s not the only segment that invests in new issues. Today, there is a large pool of domestic capital in the form of insurance companies and mutual funds that are equally important and have been participating in a big and meaningful way in IPOs. In fact, a large portion of the anchor books of several IPOs have been subscribed by these domestic investors,” says Satyen Shah, head - investment banking, Edelweiss Financial Services. In 2016, domestic investors have been net buyers of Indian equities investing close to Rs.33,000 crore.

While the increasing presence of domestic investors lend much-needed stability, the overall sentiment tends to drive markets towards exuberance or pessimism. “Most of the negatives, both global and domestic, have already been priced in. The key risks are the central budget and UP elections. If the budget doesn’t appeal to investors, it would have its implications. The UP elections will have a bearing on the bargaining power of the present government and policy making,” says S Subramanian, managing director - investment banking, Axis Capital.

The year that was
2016 hasn’t been a bad year at all for the primary market. About 27 companies have raised close to Rs.26,500 crore, which is almost twice as much that was raised the previous year. In 2015, 21 companies raised about Rs.13,564 crore. If SME IPOs are included, India with 83 IPOs in 2016 comes in as the seventh most active primary market globally going by the number of deals, according to a report by Ernst & Young.

The report further states that India, whose IPO activity is at a six-year high, was the stand-out performer in the global market, recording a 38% increase in deal volume and a 79% surge in funds raised, driven by stronger economic fundamentals and a pro-business political regime. The IPOs that listed in 2016 haven’t fared too badly either. Of the 27 that were listed, only eight IPOs are trading with negative gains sitting on an average loss of 20%. The balance 19 have done pretty well for themselves delivering an average return of 46% so far in the year 2016.

Robust pipeline
Despite the concerns surrounding the secondary market, the redeeming factor for the IPO market in 2017 could well be the quality of companies looking to list. Companies like GoAir, D-Mart, Vodafone India, SBI Life Insurance, Hindustan Aeronautics, HUDCO and Cochin Shipyard are all lining up for a listing in 2017 making it one of the most interesting years that IPO market has seen in sometime.In the last 16 years, only 2007 and 2010 have been stand-out years for the primary market. In 2007, about 100 companies issued IPOs raising Rs.34,179 crore. In 2010, 64 companies, raised Rs.37,534 crore. 

Investment bankers say that quality companies attract money irrespective of market sentiment, particularly in sectors where FIIs participation has been low. For instance, SBI Life Insurance, where SBI holds 74% stake, recently got board approval for the IPO at Rs.460 a share and will garner a lot of interest from investors when it comes for listing, given the lack of options in the insurance space. The company, which will be valued close to Rs.46,000 crore, already has private-equity heavyweights such as KKR and Temasek as investors having picked up 1.95% each. 

Looking ahead
Over the years, the government has been effectively using the equity market to achieve its divestment objectives. Last year, the government raised close to Rs.34,800 crore in both primary and secondary market, which was slightly lower than the amount it raised (Rs.35,236 crore) in 2015. This year the government is eying to raise Rs.40,000 crore. To start with, the government is looking to divest about 10% in Cochin Shipyard to raise about Rs.350 crore followed by HUDCO, raising Rs.1,500 crore for a 10% stake sale and another Rs.2,000 crore from a 10% stake sale in Hindustan Aeronautics.

The government needs divestment money to recapitalise banks and for infrastructure and social schemes to compensate for the decline in economic growth as a result of demonetisation. It will look for more divestment candidates and investment bankers are not ruling out the possibility of PSU giants such as LIC and others coming to the market. 

If the market sentiment and liquidity deteriorate further, things could get challenging for the IPO market in 2017. But given that there is always appetite for quality stocks, a sense of optimism prevails.

Subramanian adds, “My guess is that this year we are looking to raise close to $6-7 billion because of fairly large sized IPOs. If the Vodafone IPO comes through, that alone will be around Rs.2,000 crore. More importantly, the pipeline of IPOs for 2017 is full of good quality companies. They will find buyers if the pricing is right.”