Should you be cautious amid flurry of IPOs and post-listing frenzy?

Are you among the investors who missed the opportunity of investing in recently launched initial public offerings (IPOs)?

Do not worry, as many IPOs are expected to hit the primary market in the coming months.

It appears the Indian market is awash with IPOs. With the sharp turnaround in secondary markets after the March lows, the primary market, too, has rebounded after witnessing a dull first half.

As one after IPO hits the street, investors are rushing to the primary market to make most of the opportunity. The increase in liquidity flows is also helping their cause.

Experts believe the government's focus on Atmanirbhar Bharat and the divestment process could also motivate many unlisted private companies to come forward and raise capital.

Flurry of IPOs

The reopening of the economy and sharp rally in the secondary market revived investors’ confidence and renewed interest in the primary market.

Experts point out that widespread investor awareness and higher risk propensity also resulted in strong retail participation.

"In the last six months, a lot of new retail investors have come into the market. Since there had not been any lucrative IPO opportunities since March, retail investors participated heavily once the IPOs started hitting the market. The abundance of liquidity also drove over-subscription," said Hemang Jani, Group Senior Vice President at Motilal Oswal Financial Services.

"The majority of the recent IPOs so far were good offers that came after a long time. They either enjoyed strong leadership or had niche businesses or were present in the buzzing sectors. With the rising interest in mid-caps and small-caps, investors were on the look-out for new ideas to invest in and these IPOs provided them the same," Jani said.

Jani pointed out that the stellar debut by the two companies - Rossari Biotech and Minspace Business Park REIT in July instilled faith in the investors. Investors got attracted by the strong grey market premium which has the potential to give substantial listing gains.

Jehan Bhadha, Assistant Vice President - Equity Research at Nirmal Bang explained that the stock markets typically witness a flurry of IPOs when they are buoyant as higher valuations prompt private companies to unlock value by listing on the stock markets.

"Historically we have witnessed this trend of a strong rally in stock markets followed by a large number of IPOs. Over the last 15 years, the annual average number of IPOs is at 35, while in years when the stock markets performed exceeding well, the number of IPOs was substantially higher," said Bhadha.

"In the year 2007 there were 96 IPOs; in other buoyant years of 2005/06/10/17 the number of IPOs was 50/73/66/38. As opposed to this, during years when the stock markets performed poorly, like 2018 and 2019, the number of IPOs dried up to mere 25 and 16, respectively," Bhadha added.

Post-listing frenzy

Some IPOs, especially those with niche businesses and from sectors that have been largely unaffected by the pandemic or even emerged as a beneficiary, saw post listing frenzy.

Jani of Motilal Oswal pointed out many IPOs belonged to Telecom, IT, Pharma and Chemical space which were backed by a robust response. But sectors that had got affected by the unprecedented crisis failed poorly.

"Likhitha Infrastructure is an example of this, which had to extend the dates and even lower the price band. Also, lower and narrower allotment to retail investors led to a frenzy in the post-listing trading of the shares as they felt out," Jani said.

"An example of this would be CAMS and Chemcon Speciality Chemicals which got listed on the same day. While the CAMS saw listing day gains of 23 percent, Chemcon Speciality Chemicals recorded listing day gains of 115 percent. As the allotment to retail investors was much larger and widespread in CAMS, given its large issue size, the post listing demand was moderate. This was due to the fact that the Chemcon Speciality Chemicals offering was subscribed 102 times of the issue size, compared with 46.7 times in the case of CAMS," Jani explained.

There is another factor of narrower retail allotment which also contributes to post-listing frenzy.

Bhadha of Nirmal Bang underscored that SEBI regulations require a minimum of 10 percent of the post-issue capital as public shareholding and the same needs to be increased to 25 percent within three years. Thus in many cases, companies conduct IPOs in a manner where the public shareholding remains at 10 percent at the time of IPO.

Bhadha added that in most IPOs, around 50 percent of the offer is reserved for qualified institutional bidders (QIBs) who typically have a longer investment horizon compared to non-institutional or retail investors. This further reduces the free float of the company from 10 percent to between 5-10 percent and it becomes easier for a few big investors and institutions to accumulate and corner a large part of this free float, resulting in a further decline in the shares available for trading.

"Thus, due to unavailability of supply of shares, even a small demand or buying of shares leads to a frantic rise in the stock price," Bhadha said.

Amishi Kapadia, Group President & Global Head - Merchant Banking, YES SECURITIES is of the view that the post listing frenzy is driven by liquidity available in the markets.

"Across the world, central banks have infused liquidity as part of their efforts to combat COVID-induced slowdown. In India, we saw market activity picking up in Q2FY21 with four large secondary/follow on offerings and eight IPOs. Most of these IPOs were hugely oversubscribed in all investor categories resulting in investors getting lower allotment (the process of proportionate allotment). This unfulfilled demand caused by huge oversubscription would lead to investors buying once the stock gets listed," said Kapadia.

Are there any signs of caution?

Kapadia of YES SECURITIES believes select companies having a niche business model, disrupters, or presence in new-age sectors with robust business model backed by strong management teams, but priced attractively, will continue to see interest from investors.

Overall, the trend of the primary market is expected to continue and may remain in sync with the mood of the secondary market.

History shows that the secondary markets and primary markets are highly co-related.

Bhadha of Nimal Bang pointed out as of today, there is absolutely no sign of exuberance in the primary markets and there is no need for excessive caution as the secondary markets have been witnessing a gradual recovery to pre-COVID levels and there are no signs of exuberance yet.

"Also, the number of IPOs in the current year (January to September) on both mainboard (11) and SME board (25) is substantially below their historical annual averages of 35 and 66, respectively," Bhadha said.

However, a brief pause in the near-term cannot be ruled out. The near-term events like the US presidential elections, quarterly earnings season, global liquidity and COVID vaccine could also influence the primary market.

"In the near-term, given few lacklustre IPO listings (Angle Broking, UTI AMC & Mazgaon Dock) and failed Vedanta delisting offer, IPO market may take a pause for some time. But, we believe the IPO activity could resume post a short break and investor participation could continue, provided the IPO pricing is right and business fundamentals, financials are healthy," Jani said.

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