Why did Fractal Analytics IPO need QIB push to get fully subscribed despite trimming issue size by over 40%?

Why did Fractal Analytics IPO need QIB push to get fully subscribed despite trimming issue size by over 40%?

• Fractal Analytics IPO fully subscribed by day 3, driven by institutional buyers.
• Retail and non-institutional investor portions subscribed 82% and 56%
• Shares to debut on February 16; IPO valued at up to Rs 14,450 crore

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Fractal Analytics IPO managed to get fully subscribed on day 3 of its bidding on February 11 as qualified institutional investors led the subscriptions, bidding for 4.18 times the number of shares on offer for them.

Meanwhile, the portions set aside for retail and non-institutional investors were subscribed 103% and 106%, respectively.

The Mumbai-based company received bids for 49.4 million shares, against 18.58 million shares on offer, exchange data showed, thus seeing overall subscription of 2.66 times.

Fractal set a price band of Rs 857-900 per share and is seeking a valuation of up to Rs 14,450 crore at the upper-end of the band.

Founded in 2000, the enterprise AI and analytics company counts some of the world's largest technology and consumer firms, such as Microsoft and Alphabet, among its clients.

Fractal had trimmed its issue size by over 40%. The revised offer comprises a fresh issue of equity shares worth up to Rs 1,023.5 crore and an offer for sale (OFS) of Rs 1,810.4 crore, taking the total issue size to Rs 2,833.9 crore. Those selling shares in the OFS include Quinag Bidco Ltd, TPG Fett Holdings Pte Ltd, Satya Kumari Remala Rao, Venkateswara Remala and GLM Family Trust.

According to Srikanth Velamakanni, Co-founder and CEO, Fractal, the move came from the bankers and fund managers’ advise to leave “a lot of money on the table for making the IPO attractive for people to invest and see results.” The share price on the top end of the band was previously pegged at Rs 1,110 per share. At that price band, our investors said they would want to hold on, and stay on with Fractal for much longer. As they didn’t want to sell much, we had to reduce the overall IPO size,” Velamakanni told Moneycontrol in an interview on the sidelines of Fractal’s IPO roadshow in Mumbai on February 4.

Why did the IPO need QIB push to cross the 100% subscription line? The IPO comes amid global fears of artificial intelligence-driven disruption that have triggered a sell-off in software stocks.

"Unfortunately for Fractal, its IPO has come at a time when there is a lot of concern around impact of AI tools like Anthropic on data analytics and software businesses," Vipul Bhowar, senior director at Waterfield Advisors told Reuters.

Lack of valuation comfort kept investors cautious, two analysts told Reuters.

SBI Securities said the valuation looks elevated given the relatively modest compounded annual revenue growth of 18% between fiscal years 2023 and 2025.

At the upper price band of Rs 900, the brokerage said the issue is valued at a FY25 P/E multiple of 78.9x on a post-issue basis, which it views as elevated given relatively modest growth metrics.

The brokerage also cautioned that increased insourcing by clients, especially with the growing adoption of AI tools, could pose risks to Fractal’s business model. “Considering the elevated valuation, we assign a Neutral rating to the issue and would like to track the performance of the company for a few quarters post listing,” SBI Securities said.

“At the upper band of Rs 900, valuations look expensive at around 79x post-FY25 P/E, but this reflects a scarcity premium for a listed AI platform,” Swastika Investmart said, adding that the stock is best suited for high-risk, growth-focused investors with a three-to-five-year investment horizon looking to ride the global GenAI cycle.

Shares of the company are expected to debut on the bourses on February 16.

The proceeds from fresh issue will be used by Fractal to invest in its subsidiary, Fractal USA, for repayment of debt, buy laptops, set up new offices in India, invest in research and development, support sales and marketing under Fractal Alpha, fund acquisitions and other strategic initiatives, and general corporate purposes.

The company will make its stock market debut on February 16.

Fractal, which was co-founded by Srikanth Velamakanni and Pranay Agrawal in 2000, supports large global enterprises across multiple industry verticals and business functions with data-driven insights and assists in decision-making through end-to-end AI solutions.

Fractal is a leading pure-play data and artificial intelligence company and has domain expertise spanning across consumer packaged goods & retail, technology, media and telecom, healthcare and life sciences, and banking, financial services and insurance.