2019 has been a good year for Indian capital markets driven by both domestic and foreign institutional (FII) inflows. The first half of FY20 started on a positive note with two IPOs in April.
After the renewal of mandate to the government, 4 IPOs were successfully completed and the total funds raised through these 6 IPOs were Rs 75,300 mn (Rs 4,000 mn above IPO considered).
Investors gave thumbs up to thematic IPOs across sectors ranging from technology, hospitality, microfinance, consumer, healthcare, etc. Overall, investors continued to chase companies with a distinguished track record of operating and financial performance backed by strong corporate governance.
IPOs of IndiaMart, Affle, Chalet, Metropolis, Spandana, Polycab, IRCTC, CSB, and Ujjivan were a resounding success and have given handsome returns post listing.
One theme that continued to play out this year as well as the increasing component of an offer for sale (OFS) instead of primary capital in IPOs.
This we believe stems from two reasons: expansion plans of the traditionally capital intensive companies have got delayed and therefore they have postponed their IPOs.
Secondly, over the past couple of years, there is significantly more interest for companies with an asset-light business model from sunrise sectors like insurance, asset management, technology, healthcare, etc.
Thirdly, fresh capital fund raised is happening through the private equity route as these investors are able to perform proper due diligence on the company and could get a board seat (unlike public market investors).
They are sophisticated investors who bring a lot of value add for the company in its early years as they have seen similar business models globally.
On the listed side, while overhang of the ongoing NBFC liquidity crises will be there in at least the first half of next year, there is some ongoing consolidation in the lending space and a clear separation of “Boys from the Men”.
Quality, scale, and granularity attracted investors and large banks and quality NBFC companies emerged as clear beneficiaries.
Follow Ons: QIPs, Blocks, and OFSs in 2019
We believe that this year we saw the reemergence of QIP as a product with investors giving thumbs up to high-quality large issuances like Bajaj Finance, Axis Bank, RBL Bank, Shree Cement, Varun Beverages, PVR, etc.
While in 2019 we saw that number the QIPs were less, the quantum of fundraised was almost double compared to 2018 (~INR 35K cr. in 2019 v/s ~16K cr. in 2018).
Given the current appetite for high-quality companies we feel that large QIPs will find strong interest amongst investors next year as well.
Companies that IPOed in the last few years and have continued to demonstrate strong growth found favor with investors in the secondary markets.
Overall we saw ~$7bn of secondaries in the form of blocks and OFS to hit the market this year. This year we saw OFS and blocks in companies like Axis Bank, HDFC Life, STFC, LTTS, SBI Life, ICICI Life, and General, RNAM, HDFC AMC, etc.
On the divestment front, we saw large offerings by the government in the form of ETFs with underlying PSU/SUUTI stocks.
There was robust demand not only from the institutional investors but also from the HNI/Retail investors as these underlying stocks are high dividend-yielding and the offer was launched at an attractive discount.
Early Next Year:
We believe that the strong performance of IPOs in 2019 will have a rub-off effect on the upcoming IPOs. A positive budget expectation and new FII allocations to emerging markets especially India should give a further boost to the primary markets.
Increasing talks of US-China trade deal, stable global markets and more reforms by the Government will further provide stability to the market and help in picking up of deal momentum
In 2019, July-September was a volatile period both in India and globally and few IPOs got pushed the first half of 2020. SEBI card also expired for some of the DRHPs of these companies who will look to restart the process in the next 3-6 months.
There is a strong pipeline of companies looking to hit the markets in the first half of next year. We may also see increased activity in the number of Pre-IPO deals in 2020 if the IPO activity picks up.
Overall we believe there will be interest for thematic and first of its kind stories. New age sectors like technology, healthcare, asset managers, insurance, pharma, and high-quality NBFCs will continue to attract investor interest.
Due to the consolidation and regulatory issues in the telecom space, we may see telecom companies tapping the capital markets. This may result in another round of large offerings by telecom players this year.
On the PSU side, the Government will continue to tap the primary markets for value unlocking in PSU’s and achieve its disinvestment target.
A large number of PSU Banks are looking to augment their capital base through QIP or monetizing their stake in subsidiaries through OFS or IPO.
Appetite for different products is there
In terms of products, we believe that primary market again will be driven by IPOs: but we believe there will be come back of large IPOs that were missing in 2019.
Along with IPOs, we believe that in secondary markets along with OFS/ Blocks there will be appetite for QIPs (primary fundraise into the company) as most of the QIPs this year have been very well received by the markets and going forward we believe there will be sector and stock-specific appetite for select financials, consumer, basic materials, etc.
It is clear that besides strong financials and operating performance, investors are willing to pay a premium to high-quality companies backed by strong management, promoters, and financial sponsors.
However, some issuers who are unable to launch their offering in the first half of next year will look at alternate fundraising routes like Pre-IPO/ Private Equity subject to business requirements and valuation expectation.
With the success of BlackStone REIT and L&T Private Invit, there are a lot of companies in the Infra/Real Estate sector who are evaluating InVit and REITS as a tool to monetize assets.
There is a lot of appetite from global long-only investors for yield focused play. In Invits there is interest for private invits from global long-only pension funds and insurance players. We can see a number of Invit offerings from platforms backed by financial sponsors.
Similarly, for REITS, there is a strong interest in the product and we believe the market is more receptive for such rental yield generating commercial assets.
Domestic investors are also now more open to evaluating this product which was possibly not the case 12 months back.
Overall we believe that there will be strong investor appetite from both FIIs and DIIs in IPO’s next year. Along with IPOs, we believe there will be interest across products and thematic stories.
In secondary markets along with OFS/ Blocks there will be an appetite for QIPs as most of the QIPs this year have been very well received by the markets and going forward we believe there will be sector and stock-specific appetite for select financials, consumer, pharma, healthcare, technology, basic materials, etc.
(The author Co-Head Equity Capital Markets, ICICI Securities)
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