Rise And Rise Of IPOs: As Investor Appetite Returns, Sector Specific Credit Revival On The Anvil

More and more firms are now taking the Initial Public Offerings (IPO) route to raise money. From fiscal year (FY) 2011-12 (FY12) to FY15, this was not the preferred choice of companies but in the past two years, IPOs are on upswing, thanks to improved market sentiment and increased appetite of investors.

SBI’s Ecowrap report released today (4 December) notes that in first seven months of current fiscal year (FY18) alone, companies have raised Rs 49,175 crore. Last time the going was this good was in FY10 and FY11 when firms raised Rs 46,121 crore and Rs 49,438 crore respectively. To put the figures for current fiscal in perspective, companies have raised more money via IPOs in first seven months than they did in the four fiscals between FY12 and FY16.

As the SBI report points out, this development is testament to the market appetite and investor acceptance of equity as an asset class. From FY10 to FY18, the top sectors which raised money through the IPO route were the power sector, followed by insurance, mining, minerals and metals, finance and construction. Power garnered the maximum amount at Rs 43,921 crore. Insurance sector which came to the market only this fiscal has itself raised Rs 31,320 crore.

Last fiscal, Avenue Supermarts Ltd received a bid of Rs 1,37,277 crore against the issue size of Rs 1,870 crore. It was Coal India Ltd seven years ago which had performed so good, receiving a bid of Rs 2,31,031 crore against an issue size of Rs 15,199 crore. This fiscal, Cochin Shipyard Ltd took the cake. It received a bid of Rs 1,09,348 crore against an issue size of Rs 1,442 crore.

Given below is year-wise list of companies attracting highest subscription amount.

What are the reasons for the rise and rise of IPOs in the last two years? SBI report lists four main reasons: ease of listing criteria for micro, small and medium enterprises; economic reforms undertaken by the Narendra Modi government which were validated recently by Moody’s; surge in secondary market which has encouraged firms to hit the equity market for capital in search for better valuations; and increased appetite shown by retail investors for equity markets, mutual funds and IPOs, thanks to lower interest rates on bank deposits and improved market sentiment.

Ecowrap also notes an indirect correlation between equity raising and credit growth in specific sectors. It finds that ‘the years witnessing higher IPO in general have shown a modest pick up in credit growth.’ A positive relation between credit off-take and IPO is visible for sectors such as power, mining and quarrying, and housing finance. However, there are also sectors such as computer software and pharmaceutical industry which have witnessed a decline in advances despite raising money via IPOs. The SBI report attributes this more to global factors rather than domestic ones.

On the whole, this a positive development for India especially in the current context when we are facing the problem of twin balance sheet problem and private investment has remained a drag on the economy for quite a while. Whether this development sustains will depend on how much returns this route can give to investors. If average price remains above the listing price, it will continue to be attractive. However, the report notes, it can’t be assumed to take place of debt financing through banks.