Primary Market in FY23: A repeat of FY22 likely, could be even better

In fact, these new-age digital firms raised the highest fresh capital during the year with public issues like Paytm garnering Rs 18,300 crore and Zomato Rs 9,375 crore. Paytm, in the process, became the biggest IPO ever, as it surpassed Rs 15,200 crore raised by Coal India in 2010.

Barring a few, most of these companies that were backed by private equity or venture capital firms, received tremendous response from investors and went listed at substantial premiums. They traded with good positive momentum in 2021 but fate turned sour from the start of 2022 as the secondary market turned volatile on concerns surrounding the potential interest rate hike by US Fed.

“This led to a sharp correction in the share price of these new tech companies and dried up IPOs in the fourth quarter,” said Sneha Poddar, AVP Research, Broking and Distribution, Motilal Oswal Financial Services.

As bulls began raging the secondary market from the start of 2022, a strong ripple effect reached the simmering primary market, making a strong case for promoters and PE/VC investors to demand the highest valuations for their companies. Retail investors flock to these offers in hoards throwing caution and rationality to the wind.

“Despite a lacklustre fourth quarter, we believe the primary market would continue with its buoyancy in FY23 as well, as good economic recovery, de-escalation of tensions between Russia and Ukraine and return of FII inflows have improved the investor sentiments once again,” Poddar said. Good listing by many IPOs in FY22 has also instilled confidence in investors.

The PE/VC investors made a killing through these IPOs during the strong bull run. Data shows that PE/VC investors managed to take home a mammoth Rs 82,700 crore from the Indian primary markets which is more than four times the amount they made in FY21.

What the retail investors fail to understand is the fact that when market sentiments change, these companies which were commanding hefty valuations, underperform considerably. Although the BSE IPO index beat the Sensex in FY22, it has underperformed by 17 percent over the last six months.

National markets regulator Securities and Exchange Board of India (Sebi) has already given its observations and approvals to 56 companies seeking to go listed. The companies aim to mop up a massive Rs 1.4 lakh crore in FY23.

The year is also likely to see the biggest public issue in the history of the Indian primary market with the Life Insurance Corporation of India aiming to raise around  Rs 65,000-70,000 crore from dilution of 5 percent government holding. The company's 31.60 crore shares are expected to hit the market in May.

“The Centre fell far short of its initial disinvestment objective of Rs 1.75 lakh crore for FY22, receiving only Rs 13,531 crore,” said Mohit Nigam, Head of PMS at Hem Securities. In FY23, it may set a new high on this front. “According to the present plan, thanks to the projected LIC IPO, the Centre's disinvestment revenues could exceed the annual disinvestment target of Rs 65,000 crore for the current fiscal in Q1 itself.”

While 56 companies have got the Sebi green light to float their public issues, 41 more are in the queue. Approvals to these companies will add another Rs 81,000 crore to the fund-raise pipeline.

“Apart from LIC, many more new age companies are likely to come up with IPOs in the coming months. These include the likes of Oyo, Ola, Pharmeasy, Delhivery, Byjus, MobiKwik, Snapdeal, FLipkart, Swiggy and Ixigo,” said Poddar. It could push the FY23 fund-raising through IPO beyond the FY22 figure.

IPOs of FY22—a mix of outperformers and underperformers

A word of caution

While the markets are largely in control of bulls, there are certain fundamentals that trigger a cause for concern for investors as well as policymakers.

“Rise in developed market interest rates normally affects flows in emerging market equities, so there will be some impact on the markets - secondary markets, more than the primary markets,” said Venkatraghavan S, Managing Director and Head of Equity Capital Markets, Equirus.

Domestic inflation risk is there, and along with increasing global interest rates, domestic interest rates will also rise. However, domestic liquidity continues to be robust.

“IPOs in new sectors, or differentiated companies will still see good interest, however, me-too companies will have to have attractive valuations to be successful,” Venkatraghavan said. “In summary, I expect the primary markets to still be reasonable, if not as robust as the previous year.”

It is of utmost importance for investors to analyse each IPO based on its strength and should not get affected by the ‘fear of missing out’ (FOMO). The markets are known for bringing the correct valuations to the fore and overpriced companies are bound to come down to their actual value once the initial euphoria wanes off, as cane be seen in 38 percent of the total IPOs in FY22 which declined between 8-76 percent compared to their issue price.

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