What a remarkable year it is for the Indian stock market. The way it revived from the 2020 crash and reached new heights was spectacular. This journey would have been incomplete without the IPO show.
Nowadays, do you feel missed out when all your friends are discussing an IPO? Or feel heavy-hearted when you have applied for it and don't get any allotment? These questions have been in our mind too, since the past few months as the monsoons have started, and by ‘monsoon’, we mean ‘raining IPOs'.
Today, we discussed why there are so many IPOs in the market making it a golden period for them, and should you even subscribe to any of these.
So, let’s take a look! But before moving any further we will start by glancing at what happened last year.
Bulls scaring the Bears
Before the drum rolls, let's look at what has happened in markets since last year. If you all remember, the markets were so pessimistic during March 2020 after the first lockdown.
Nifty50 was trading at around 7500-8000 levels, and all we were anticipating was that the markets might correct more. To our surprise, there was a ‘V’ shaped recovery, and the bears vanished into thin air.
Looking at this positive move by the market, companies started to file their IPO prospectus with SEBI. Last calendar year some of the popular ones were Equitas Small Finance Bank, Mrs. Bectors, Burger King, CAMS, Angel broking, etc. We had more than 15 IPOs last year, and at least three of them were subscribed more than 100 times. These companies raised around ₹27000 Cr from investors in 2020.
This year too, the list is going long. We had our very own Zomato, Devyani International, Indigo Paints, MacroTech Developers, CarTrade, and others until Oct. Companies this time were able to raise 3x the amount of 2020 in just 9 months of 2021. Hold on; this is not over yet; more IPOs lined up too like Paytm, Mobikwik & Nykaa. So, 2021 has been a golden year for Indian companies.
DID YOU KNOW: 42 IPOs were launched in the first nine months of this year raising around Rs 670 billion in the Indian stock market.
Let’s bring out our detective lens and start investigating the reasons for the IPO rush.
Reasons for the IPO flood
One thing which we noticed about this IPO rally is that most of them are internet startups i.e., most of them are technology businesses. Look at CarTrade, Mobikwik, PayTm, Zomato, Nykaa, Delhivery, Policy Bazaar and more. All of them are technology startups, and with this new normal, can you recall what were the major changes in our routine? We started using apps like Microsoft Teams, Zoom, Zomato, Flipkart, Netflix, Amazon, Paytm etc more frequently. That meant all these businesses needed more money to expand their reach and to expand their horizon they needed more funds. This would be a reason they sought out for an IPO.
As soon as Covid struck us, RBI drastically reduced the repo rate. This reduction in repo rate led to liquidity in markets. But how? How did markets become more liquid? Let's first know what the Repo rate is! Basically, the Repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. By changing the repo rate, RBI controls the liquidity in the overall market.
As we said earlier in our scenario when the RBI reduced the repo rate, which means banks were able to borrow money from the RBI at a lower interest rate. Now, banks have to pass on this benefit of lower interest rates to their customers. As interest rates reduce we are tempted to buy more things, maybe a house or a car or anything.
So, we will use a loan to fund our expenses. When you get a loan you have more money to spend which means more liquidity, isn't it? That’s how simple this is.
But we will go a little offtopic and learn inflation too. If the supply of money is more than that means demand will have to catch up with it and if demand increases that means prices of goods will increase. And what do we call an increase in the price of goods? We call it inflation.
How decrease in Repo rate affects liquidity? If you look at RBI’s repo rate it was 6% in April 2019 which RBI cut down to 4% in May 2020. This is how RBI, our messiah, saved us. Viceversa, if interest rates are increased liquidity in markets will be reduced.
It's not necessary that all central banks follow the same path as the RBI did. For instance, the US Fed, the American central bank, printed a little over $3 trillion in order to counter the economic impact of Covid-19. They increased the supply of money in this way. Now, money supply increases, which means something has to be done with these extra funds. Maybe you can invest these excess funds. But where? Somewhere, where you could get good, safe returns.
Where else would these developed economies invest in? Obviously in emerging economies. That’s why FDI and FII investments increased in India. And that’s how we entered our bull markets. Now if the foreign funds are coming to you wouldn't you want to reap its benefits?
Along with foreign funds, India witnessed large participation of retail investors too. Demat accounts at CDSL and NSDL have risen from 4.02 Cr in Feb 2020 to 6 Cr in June 2021. Can you believe Demat accounts have increased by 50% in a span of just 1.25 years. The main reason for this surge was lockdown as individual investors began to try their luck directly into the market along with how easy it became to trade and invest with the emergence of discount brokers. Until now, retailers mostly relied on equity mutual funds as a source of investment but now the dynamics are changing.
“Make hay while the sun shines”.
As money is available readily now, lots of promoters are crowding at SEBI’s door with their application for IPO so that they can raise funds at a bit higher valuation. Corporate circles believe that one should raise money when it is available rather than when it is needed. (Irony). That’s why most companies issue their IPOs during bull markets and not when they actually need money.
Should you invest in IPOs?
There have been many IPOs till date and there will be many more. But the big question is whether we should participate in any of them?
Let’s see what Mr. Buffett is saying about IPOs
“An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favorable to you. So, by scanning 100 IPOs, you’re way less likely to find anything interesting than scanning an average group of 100 stocks.”
Some believe IPOs are not a fair offer to investors. Why? In an IPO generally founders, venture capital firms, large individual investors – “cash out” at least a portion of investments in the business. Now if they are to cash out, it’s common sense why would anyone offer his/her shares at a lower price? That means IPOs are overpriced.
Just look at the CarTrade IPO this year, there wasn’t any fresh issue, rather the promoters only cashed out. Should we even call this an IPO? For this very reason, Ben Graham called IPOs - Insiders’ Private Opportunity
Well, this may not always be the case. There may be a few good-run, well-managed businesses coming into the market. Back then too, we had the IPO of TCS, Sun pharma, and HDFC bank which still are top businesses managed by a world-class team. So we can’t directly conclude that all IPOs are the same (expensive and fraudulent).
So, all we can advise you is, do read the DRHP of the company to know about it and the sectors it is in before applying for an IPO.
Pro Tip- Try to understand the industry & business of the company before analyzing the financials.
To ease your research process we bring to you, The Upcoming IPO section from Ticker by Finology where you can review companies that have filed for an IPO with SEBI.
So the main reasons for The IPO mela are increasing interest of foreign investors in Indian stock markets, increasing retail participation, enhanced liquidity & how easy stock market investments have become these days. Thus, the promoters & Capitalists want to strike while the iron is hot.
There is a large chunk of participants that invest in IPOs just for listing gains but a lot of these companies are worthy of long-term investments too. The ultimate call is yours but before rushing into an IPO merely for listing gains we advise you to thoroughly understand the company, refer to the official documents & statements and do your own analysis.
Be a Safe & Happy investor and also if you liked our findings share them with your Friends & Family. :)