Navigating market pressures: Why IPO issuers must prioritise listing gains

Navigating market pressures: Why IPO issuers must prioritise listing gains

By Umesh Agrawal, a fund manager with 360 One Asset. Views are personal.

The NSE Smallcap Index has declined by approximately 20% year-to-date, while NSE Midcaps are down 13%, compared to a more modest 3% drop in Nifty 50 and Sensex. In contrast, global markets have shown resilience — MSCI China is up 15%, Europe has gained 10%, MSCI Emerging Markets (EM) 6%, and the S&P 500 around 4%. This disparity highlights the strain on Indian equities. Foreign Institutional Investors (FIIs) have offloaded a net $11.6 billion, with Domestic Institutional Investors (DIIs) absorbing most of the selling pressure.

A combination of sustained selling, slowing earnings growth in Q3, potential downward earnings revisions, and concerns over high valuations is weighing on stock prices. Prolonged negative returns could also dampen retail investor inflows into mutual funds and direct equities. Sectors that witnessed sharp rallies in 2024, such as real estate and capital goods, have experienced deeper corrections than the broader market.

Currently, 70 companies have filed Draft Red Herring Prospectuses (DRHPs) with SEBI and await approval, while 36 companies have received clearance, aiming to raise over Rs 1 lakh crore. Since mid-2020, post-COVID, approximately 273 companies have listed on Indian stock exchanges. While 31% of these are trading below their issue price, a notable 44% have delivered returns of over 25% above their listing price.

The Indian market has demonstrated its depth by successfully absorbing large issuances, including a recent tech IPO worth Rs 8,750 crore, entirely an Offer for Sale, which closed its first day 6.77% higher than the issue price despite weak market conditions. This underscores that well-priced IPOs from quality companies continue to find investor demand.

IPO investors are becoming increasingly cautious, prioritizing quality companies with disciplined pricing strategies. Pricing negotiations are intensifying to ensure listing gains, a positive development for both issuers and the broader market.

Issuers have two primary options: lower pricing (and, if necessary, recalibrate issue size) or defer their offerings. A better approach is to focus on building a robust anchor book and ensuring strong participation from High Net-Worth Individuals (HNIs) and retail investors rather than solely maximising the issue price. Listing gains contribute to sustained post-listing performance.

For investors like us, the flexibility to invest in both private and public markets presents an opportunity to deploy larger ticket sizes at more attractive valuations. Companies are increasingly open to pre-IPO funding within the DRHP framework, providing them with immediate capital while waiting for more favorable market conditions. However, a significant shift in market sentiment will be necessary to absorb the substantial IPO pipeline ahead.