A booming inventory market typically offers fertile floor for an IPO spree.
With Food-Tech platform Zomato’s Rs 9,375 crore preliminary public providing (IPO) being oversubscribed by 38 instances, the main focus now shifts to July 27, when the corporate’s shares might be listed on the inventory markets for buying and selling. As the primary Indian ‘unicorn’ – a startup valued at $1 billion or extra – to return out with an IPO, Zomato has created a particular place for itself in India’s startup historical past.
Moreover, the Zomato IPO – probably the most excessive profile of the yr to this point – can be emblematic of the ‘IPO spree’ being noticed in 2021 amid the crippling Covid pandemic.
Generally, a booming inventory market typically offers the fertile floor for an IPO spree. “Primary market (IPOs) is closely linked to the secondary market (share market). Whenever the latter is performing well, companies line up for IPOs,” stated Hitesh Punjabi, Asst. Professor, KJ Somaiya Institute of Management Studies, Mumbai, whereas referring to the inventory market increase of mid-2000s and the excitement round Reliance Power’s IPO in early 2008.
In FY21, which coated the interval of the Covid-induced lockdown and several other ‘unlocks’, the BSE Sensex rose over 68 per cent and NSE Nifty 50 index rose by 71 per cent. In FY 21, over 20 IPOs listed at a premium to their concern worth, in accordance with Equitymaster.
Sample this: Happy Minds, an IT consulting firm, reported a 111 per cent achieve on itemizing – the most important in a decade. Its share was issued to the general public at Rs 166 and opened increased by 111 per cent at Rs 351.
Kiran A Shah, Co-founder and CEO, SRE Wealth, says, “Sectors like chemicals and IT, and tech companies are doing well amid the pandemic.” While the speedy push for digitisation through the Covid-19 pandemic has been credited for the robust IT and tech sector efficiency, the increase in chemical sector has been linked to developments in China.
Lalit Kumar, Founder of Chennai-based LKR Advisors, explains: “The boom in chemical sector is predominantly due to the environmental norms in China where 40 per cent of its chemical manufacturing capacity were shut down for safety inspections.”
The increase in chemical shares for the reason that final yr has meant that lots of the 20-odd IPOs since final yr had been from the sector. Clean Science, a speciality chemical agency’s IPO was oversubscribed by 93 instances on July 9 and the shares listed at a premium of 98 per cent on the BSE on July 19.
At a time when reviews of financial misery in India have been aplenty, the increase within the inventory market is bound to puzzle these not acquainted with its working. Market observers say that the exponential rise in demat accounts – signifying the rise in new retail traders – and the large inflow of worldwide cash into the inventory market is fuelling the “bull run”.
“A lot of youngsters have entered the retail market during the pandemic. In fact, Paytm said 27 per cent of the Zomato IPO applicants were under the age of 25,” Mr Shah stated, including that low rates of interest are additionally encouraging folks to spend money on shares. As per the CDSL and NSDL, Indian traders opened a document 1.42 crore demat accounts in 2020-21. “The pandemic has been a blessing in disguise for the markets. Many millennials sitting at home are now investing,” Mr Kumar stated.
India noticed document international portfolio investments (FPIs) of Rs 2,74,034 crore in FY21. Bloomberg, as well as, states that international traders have invested over $8 billion in India this yr (until mid-June 2021). This has helped the market stay flush with liquidity since over a yr. For the uninitiated, FPIs are investments by international residents in securities together with shares, authorities bonds and company bonds and many others.
“IPOs at Nasdaq have raised $50 billion from January to June 2021. India raised $5bn as against $2.5 billion last year during the same period. Non-institutional investors are bringing liquidity in the market purely from short term funding at 3.75-4.5 per cent for listing gains,” says Mr Kumar, highlighting the buoyant world markets.
Given the buoyancy within the markets, IPOs appear to be a viable possibility for corporations and traders alike. Nonetheless, many IPOs this yr, consultants say, might be distinctive. “New business models are coming to tap the markets this year,” says Mr Punjabi whereas referring to the new-age tech corporations like Zomato, Paytm and Mobikwik amongst others.
The problem will lie in valuing such new-age corporations whose enterprise fashions, with years of losses distinguished of their revenue & loss statements, are fairly totally different from these of conventional corporations.
“It is very difficult to value digital firms unlike traditional firms. These companies can grow enormously too,” says Mr Shah. Mr Punjabi nevertheless recollects how Infosys too had confronted such a problem when its IPO hit the market in 1993. “Analysts could not decode a method to value it as the IT was a new sector. However, many years down the line, we now know how such companies are to be evaluated.”
Hence, Zomato’s recently-ended IPO has additionally come below the lens of analysts for its long-term viability.
“Zomato is highly priced. During the pandemic, it has done well. But once things go back to normal, people will like to go back to eating out. We need to see if Zomato will be able to handle such a situation,” notes Mr Shah. However, he additionally sounds hopeful, including that Zomato might be the torchbearer for ‘unicorns’ who’re planning to go for an IPO sooner or later.
Mr Kumar is much less captivated with Zomato’s prospects. “Zomato has not been able to make a profit since the start. For it to make a profit, it needs some heavy lifting and Rs 9,000 odd crore infusion may not be enough,” he stated.
The present upswing within the inventory market has already triggered some murmurs of a potential bubble burst sooner or later.
Mr Punjabi says that the beneficial properties Zomato shares accrue on the itemizing day (July 27) might be key. While over-subscription does assist construct expectations of bumper beneficial properties, any unfavourable issue coming to play that day might result in traders gaining solely marginally, he added.
“For the long run, I would suggest people to wait and watch the financial performance of the company for a while.”
Mr Kumar believes the IPO market is in a bubble which will not burst proper now, however when the market settles down and liquidity goes down. “We may see a fall of 30-40 per cent in recently-listed stocks,” he argues.
Amid the euphoria of a raging IPO market and a surging inventory market, the dire state of affairs of India’s actual financial system continues to be a contrasting actuality.
Take these numbers for a perspective:
According to Confederation of All India Traders (CAIT), localised lockdowns through the second wave led to losses of Rs 15 lakh crore in April and May 2021. According to the Centre for Monitoring Indian Economy (CMIE), 1 crore Indians have their jobs because of the second wave of Covid-19. Ninety-seven per cent of the households have confronted lack of earnings for the reason that pandemic-induced restrictions started in 2020, it added. Fuel costs are over Rs 100 in all main cities, including to the excessive retail inflation in India.
What explains this dichotomy? Mr Shah stated the inventory markets are mainly forward-looking, the place folks commerce retaining future potential earnings of an organization in thoughts. Mr Punjabi concurs with this, however provides that the inventory market has already discounted the disruptions in the true financial system and is anticipating higher financial prospects within the subsequent 6-8 months. “If things do not go as expected, then we may see the stock market going down in the coming months,” he argues.
“Bigger companies have grown bigger in the last one year. But smaller MSMEs have struggled and many have shut down too,” Mr Kumar observes about the true financial system.
Anjela Tarneja of Oxfam India, a non-profit organisation primarily based in Delhi, dismisses any connection between the inventory market and the true financial system hit by the pandemic. “Much of the rise of the stock market is a result of international investments in Indian companies. Indeed, the RBI had warned that the surge in stocks ‘poses the risk of a bubble’.” In reality, she bats for a extra multi-dimensional measure that measures totally different socio-economic dimensions than a single unit metric like inventory market or GDP development.
