India's IPO boom set to continue in 2021 as equity markets touch new highs

Indian firms raised 450bn rupees through public share sales in 2020, more than double from a year earlier

A man walks out of the Bombay Stock Exchange (BSE) building. Indian stock markets have touched new record highs as equities rally continues. Reuters

Last year turned out to be a bumper year for stock exchanges in India and companies that debuted on bourses in Asia's third-largest economy. Analysts expect more of the same in 2021.

The value of initial public offerings by Indian firms more than doubled in 2020 to 450 billion rupees (Dh22.61bn), from 203 billion rupees recorded the previous year, according to Kotak Investment Banking, which expects the number of IPOs and their values to climb further in 2021.

The rush to list shares in India last year came as local stock markets scaled record highs, despite the country's economy plunging into recession as it grappled with the Covid-19 pandemic.

“We may continue to see heightened IPO activity dominated by resilient sectors like tech, healthcare and consumer,” says V Jayasankar, senior executive director and head of equity capital markets at Kotak Investment Banking.

“Given the robust IPO markets, we expect many unlisted corporates to list earlier than previously envisaged.”

Companies that are expected to go public this year include the tech-driven food delivery start-up Zomato, government-owned Life Insurance Corporation of India (LIC), Mumbai-based mobile games firm Nazara Technologies, and jewellery retailer Kalyan Jewellers.

“Given the positive scenario in the market, more companies are interested in listing on the stock exchange,” says Nitin Shahi, executive director of Findoc Financial Services Group. “2021 is expected to be even better on the IPO front.”

The success of last year's debutants such as Burger King India, whose December share sale was more than 150 times oversubscribed, is a sign investors are hungry for more firms to list. The company's share price more than doubled on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) on the first day of trading.

Public floats of several other firms, including Mazagon Dock Shipbuilders, were also heavily oversubscribed as they debuted on the exchanges in the latter part of 2020.

“Despite the pandemic, the majority of the IPOs in 2020 are in green, mainly due to good quality and futuristic companies, attractive valuations and above all the abundant liquidity in the market,” says Rajnath Yadav, an analyst at Mumbai-based Choice Broking.

“Sectors that outperformed the market included technology, healthcare, chemicals and consumer,” however, financial sector companies were not "received well by investors”, he adds.

"We may continue to see heightened IPO activity dominated by resilient sectors like new-age tech, healthcare and consumer," V Jayasankar, senior executive director at Kotak Investment Banking, says

Last year got off to a slow, shaky start in the first half of 2020, with markets crashing as the pandemic took hold and India went into a punishing nationwide lockdown. The global equities meltdown in March also drove Indian markets down.

But the tumult was short-lived and as global equities bounced back, Indian bourses also staged a remarkable recovery and surged to all-time highs.

Market experts say the surge was helped by strong foreign investment inflows and improved risk appetite of domestic investors, who sought investment opportunities after a lull of several months. With the boost in equities came the rush to list shares as several companies went public in the second half of the year.

“It was a fantastic year for primary market participants amidst Covid-19,” says Gaurav Garg, the head of research at CapitalVia Global Research. “The later half of the year was very exciting and gave good listing gains. Burger King, Route Mobile, Happiest Mind Technologies, Mazagon Dock were among the star IPOs last year.”

Indian stocks are already off to a good start in 2021, with the benchmark BSE Sensex Index touching a fresh high of 47,869.

“We believe that IPOs will be in the limelight for 2021 as well,” says Samir Bahl, chief executive of Mumbai-based Anand Rathi Advisors.

Demand is being driven by a high level of liquidity in the markets  while sentiment remains buoyant, with India expected to emerge from recession in the coming months.

“Signs of India's economic recovery with improving macroeconomic data, developments on the vaccine rollout, its impact on the consumer confidence and strong ... institutional and retail [investors'] sentiment will drive the IPOs in 2021 as well.”

Mr Bahl adds that “niche businesses aided by attractive pricing in their IPOs have also been a pull factor not just for institutional investors but for retail participants as well”.

Foreign inflows have played a critical role in boosting demand for IPOs.

Foreign institutional investor inflows in Indian equities climbed to $9.6bn for the month of November, the highest on record, while foreign holdings reached a five-year high of 21 per cent, according to a report by investment bank Nomura.

Whether India will be able to sustain such high levels of foreign flows into its equities remains to be seen, according to Nomura.

“Strong inflow of foreign liquidity and expectations of a strong revival in growth and corporate earnings have driven up market valuations. Liquidity is likely to be supportive in the very near term ... but is likely to peak by March 2021,” the report said.

However, the investment bank warned investors of over-optimism about India's economic revival, after official figures show that the country's gross domestic product plunged by a record 23.9 per cent in the quarter between April to June from the same period a year ago. This drop – at the height of the pandemic lockdowns – was followed by an improvement to a 7.5 per cent contraction in the three months to the end of September, as restrictions were gradually eased.

“High-frequency indicators showing recovery are materially impacted by pent-up demand and inventory-stocking as the economy opens up after the pandemic-induced lockdown that, we believe, may subside over the next two quarters,” according to Nomura.

But others believe that despite lingering worries about the Indian economy, the momentum in the IPO market can be sustained.

“Having said that liquidity was one of the factors for the vibrant IPO activity in 2020, [and] we feel the same will be continued in 2021,” says Choice Broking's Mr Yadav. “The premise of this is that globally economies will continue to print money, which will be parked in emerging markets like India.”

Ajit Mishra, the vice president, research, at Religare Broking, also remains upbeat and says that “a normal market correction is unlikely to wither investors’ interest in IPOs”.

He expects start-ups in a range of sectors including fast-moving consumer goods, retail and IT to do well in public share sales in 2021.

“They are defensive sectors and all-time investors' favourites so we expect [an] overwhelming response.”

Mr Mishra adds that “with such strong liquidity, we believe companies having strong fundamentals and promising long-term growth prospects would continue to witness strong traction, but companies which do not fill these criteria could face issues.”

Mr Shahi is also bullish on the outlook for Indian stock markets and IPO demand.

“Apart from some timely corrections, which are healthy for the stock market, the only risk which can hinder the overall progress in stock markets is the delay [in rollout] of a Covid-19 vaccine – otherwise markets are well placed to achieve greater levels in the coming years,” he says.

Mr Bahl says not every listing will be a huge success, and “we believe highly-leveraged companies will struggle to tap the capital markets or may see tepid responses".

But for firms with solid fundamentals, 2021 looks like a promising year for going public.

“Markets will have their own ups and downs, their own corrections, but companies with strong fundamentals, a good future outlook, coupled with attractive pricing on their IPOs will see successful closures,” says Mr Bahl.