The filing of draft red herring prospectuses more than halved in FY23 as concerns over high valuations, geopolitical tension and rising interest rates dampened sentiment for equities.
Only 66 companies submitted offer documents to the Securities and Exchange Board of India, down 54 percent from 144 draft papers filed during FY22, according to data from Prime Database.
A total of 34 companies came out with Rs 51,482 crore of initial public offerings and listed on the exchanges so far in FY23. This compared with 53 companies that listed after Rs 1.11 lakh crore of IPOs during FY22.
Companies typically raise money through share sales when the mood in the secondary market is upbeat. However, the current market conditions are far from ideal and many companies withdrew their IPO papers as they were not hopeful of getting a good price for their shares. The benchmark BSE Sensex has advanced 0.7 percent in the past year.
Also, investors are wary after companies that listed after their IPOs underperformed over the past 18 months.
“This trend suggests that the market conditions are unfavourable, and until they stabilise, we can expect to see only a limited number of activities in the primary market,” said Manan Doshi, cofounder of unlistedarena.com.
Exorbitant valuations
In FY23, there were fewer IPO filings because of the poor performance of high-priced IPOs in FY22. These IPOs, including those from Zomato, Paytm, Nykaa, and PB Fintech, were able to attain exorbitant valuations by demonstrating substantial growth during the pandemic year of FY21.
However, following their successful listing, the emphasis shifted towards profitability as growth rates slowed in the subsequent quarters, resulting in valuations dropping by as much as two-thirds of their listing prices.
“In light of the performance of these overvalued tech companies since their listings and the excessively high valuations at which VC funds exited the IPOs in FY22, new startup companies are compelled to reduce their expenditure and implement numerous austerity measures to achieve positive bottom lines and decent margins,” said Anmol Das, head of research at Teji Mandi.
In addition, there are other private companies with strong balance sheets and profits that have postponed their IPO plans due to the market's weak performance and volatility since October 2021, Das said.
According to Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas, the recent instability in the equity markets has resulted in a significant decrease in IPOs. Typically, companies wait for favourable market conditions before launching an IPO in order to generate high levels of investor interest despite potentially higher valuations.
Analysts have a positive outlook on the Indian primary markets, expecting them to remain strong and receptive to high-quality companies despite the challenges.
According to Gaurav Sood, managing director at Avendus Capital, many companies from various sectors are firming up plans to go public. They are concentrating on obtaining consistent figures and crafting an appropriate positioning story to ensure their sustainability.
Other firms are also primed for an IPO but are waiting for the ideal moment to submit the IPO documents to the regulator, taking into account the current market conditions. Sood expects a few companies in pharma, industrials and real estate to launch their issues in the near term.
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