IPO LANDSCAPE IN INDIA - Naman Gupta

 

The frenzy among the companies to launch their IPO’s and that of investors to subscribe to them has been at its peak with respect to India for almost a year now. This on one hand portrays a glittering image of the Indian stock markets and on the other also comes as a red flag in terms of the crazy valuations the companies have received during this period. So are the valuations justified or is it just a bubble that is waiting to be burst? Let’s dig deeper.

It is important to take into consideration the factors that have led to this IPO boom. I believe changes in the regulatory landscape, as well as the macro-economic situation, have given an impetus to the companies as well as the investors to go ahead with it. With the government imposing stringent lockdowns all over the country to curb the spread of the deadly virus, consumers exuded an extra amount of confidence in altering their purchasing behaviours from the traditional brick and mortar stores to E-commerce. Thus, e-commerce companies constitute the bulk of IPO’s and filing of DRHP. However, the IPO market boom isn’t confined to only e-commerce and tech start-ups.

With the rising penetration of Internet and smartphones, access to stock markets became easier for retail investors. Many have opened their accounts and begun investing. This is corroborated by the fact that the capital share of retail investors at NSE has increased from 39% to 45% from FY20 to FY21 and a rapid surge in investor’s Demat accounts. The investor sentiment has been positive due to the continuous long bull run, something the loss-minting firms naturally plan to leverage to ensure money is poured into them. Moreover, the hard stance of the Chinese government against their own tech companies has worked in our favour. There has been a shift in the mobility of global capital from China to India as is evident from the high FII inflows in India.

Perhaps the most important and talked about development has been the relaxations in SEBI’s Innovator’s Growth Program. The changes have made the listing process easier for firms by reducing the time period of holding the pre-issue capital to half, from 2 years to 1 year.

I believe that the nature of the markets has naturally made the valuations towards the higher end of the spectrum. However, are the valuations that high that they can be termed as a bubble? I don’t think so. Let’s look at a case-in-point of tech companies that are the talk of the town. The business model of such companies where platform requires regular servicing, the nature of the expenses in itself is current i.e they have to be met immediately. This is in complete contrast to companies requiring heavy capital expenditure which are expensed over a number of years. Thus, rather than the strength of the balance sheets in the earlier years, what needs to be looked at is the runway period and the unit economics. Thus, valuations though high are not crazy as they also factor in the understanding of the business model in the minds of the customer. After all, there is a reason that Zomato and Paytm both being loss-making units, one attracted the necessary interest from investors and the other did not.