The boom that didn’t go bust

For investors, 2020 was touted to be a bumper year for initial public offers (IPOs) in India, as the government was keen to dilute its stake in insurance behemoth Life Insurance Corporation of India (LIC), among other public sector entities. Back-of-the-envelope calculations pointed at a multi-billion-dollar valuation for LIC, and its dilution tranches were expected to crowd out other issuers, sucking away money supply.

But March saw the onslaught of Covid-19, which soon ballooned into a pandemic. India had to go into a lockdown to curtail the spread of the virus. And, in a matter of 46 trading days, the S&P BSE Sensex fell over 16,634 points, or just over 39%, from around 42,273 on January 20 to about 25,638 on March 24. This hit SBI Cards and Payment Services, which debuted on the bourses on March 16, and raised ₹10,355 crore. Its IPO had priced its shares at ₹755 apiece; the shares opened at ₹658—a decline of nearly 13% on listing day.

After SBI Cards, there was a lull in the IPO market till July when Rossari Biotech and Mindspace Business Parks REIT (real estate investment trust) mopped up ₹5,000 crore from the primary market. These issues were oversubscribed by 80 times and 13 times, respectively, while they listed with gains of 60% and 11% to their respective offer prices. Eventually, 2020 saw 12 issues raising ₹24,962 crore till November. An otherwise lacklustre year till July, 2020 has already seen a 102% rise in IPOs by value, compared to 2019’s ₹12,362 crore with 16 issues.

“While the pandemic-led lockdown did impact the IPO pipeline in the first half of 2020, a liquidity-driven bounceback helped attract investor interest,” says Mangesh Ghogre, executive director and head of equity capital markets, Nomura India. “A robust secondary market performance, large equity deals in listed stocks, and attractive valuations in the mid- and small-cap space helped drive IPO momentum.”

December also saw a slew of issues like Burger King and Mrs. Bectors Food Specialities (oversubscribed a staggering 198 times), and the pipeline for 2021 looks robust. Of course, the secondary market needs to be conducive. “As we have seen several times in the past, the IPO pipeline can vanish very quickly in case there is a correction in the secondary market,” says Pranav Haldea, managing director, PRIME Database Group. “However, if the secondary market continues to remain buoyant, there is a strong IPO pipeline,” he adds.

Excluding LIC, there are currently 30 companies which have approval from the Securities and Exchange Board of India (SEBI) for IPOs and four companies which have filed with SEBI for approval. “Together, this can result in issuances of close to ₹35,000 crore [in 2021],” Haldea says.

The secondary market seems to be discounting a lot, if not all, of the challenges the economy is posed with. Even before the pandemic hit, there had been a moderation in growth. The nationwide lockdown caused record contraction in the country’s GDP. Yet the Sensex, in just 186 trading days, recovered over 21,387 points, or a little over 83%, from the March 24 low to touch 47,026 points on December 18.

Given the pandemic-fuelled uncertainties, an obvious question is: What justifies the frenzy for IPOs? Experts say the primary market follows the secondary market. “After the deep correction in March, secondary markets have been buoyant, driven by low interest rates and resultant liquidity, thus creating a favourable environment for IPOs,” says Haldea. “Given the uncertainty around the pandemic, valuations offered by companies have also been attractive.”

Nomura’s Ghogre says that while the near-term pain in the economy is widely known, investors are taking a pragmatic approach. “Investors are taking a more holistic view of company performance over FY22 and FY23 to firm up their view,” he says. “A strong historical track record before the pandemic, attractive industry dynamics, and credible management are key factors driving investors’ confidence for IPO stories.”

When one talks of market uncertainties in the context of IPOs, the year 2008—when the global financial meltdown occurred—has to be mentioned. Then, in a matter of 197 days, from January 10 to October 27, the Sensex fell nearly 64% from 21,207 to 7,697—an absolute fall of about 13,509 points. And, the liquidity scenario in general was pretty bleak. From 100 IPO issues collectively raising ₹34,179 crore in 2007, there was a 50.5% decline to ₹16,904 crore via 37 issues in 2008.

Haldea points out that 2008 had seen a deep correction in the secondary market, unlike what has been seen in 2020. But the indices reflect the performance of only 30 or 50 companies. “There is a lot of pain in the real economy which the indices do not capture,” he adds. “There is a lot of money chasing these limited stocks which explains the rise.”

Coming back to the IPOs in 2020, retail participation has also been on the rise. According to Hemang Jani, head of equity strategy, broking, and distribution at Motilal Oswal Financial Services, a lot of new retail investors have come into the market. Jani says that retail investors participated heavily in recent IPOs as they were attracted by strong grey market premiums which have the potential to give substantial listing gains. “With rising interest in mid-caps and small-caps, investors were on the lookout for new ideas to invest in and these IPOs provided them those,” he says.

Come 2021, and the euphoria around IPOs is unlikely to fade. Ghogre says the market is looking forward to the LIC IPO given its strong position in the insurance sector. “The IPO market will be robust in 2021, and we see continued interest from investors for high-quality issuances expected next year,” he says. The market is taking the Covid-19 pandemic and the related economic challenges in its stride.

(This story appears in the January 2021 issue of Fortune India.)