IPO issue size in this fiscal is the highest in last two decades: India Ratings

The initial public offerings (IPO) in this fiscal have reached a significant level after FY18 in terms of issue size, with four months still left in the financial year, says a report of India Ratings and Research.

The strong IPO issuances in FY22 in the buoyant stock market bode well with the country’s economic recovery. Moreover, equity raising by entities will not have a meaningful impact on their debt levels, as the objective of raising funds is largely to do with unlocking the value proposition rather than creating new investments, it added.

During April to November 2021, the number of IPO count for FY22 stood at 71, amounting to ₹85,600 crore, compared with ₹27,200 crore raised by 56 companies in FY21.

Enormous worldwide liquidity owing to the culmination of fiscal and monetary expansion, strong investor appetite, favourable financial market and a sharp recovery in business conditions have uplifted the IPO market in FY22. With the announcement of IPO issue of Life Insurance Corporation of India of ₹1,00,000 crore , the total IPO size could cross ₹ 2,00,000 crore by the fiscal year end, a record high.

The last five-year industry-wise trend highlights the significant jump in retail IPOs. It includes the new-age, tech-oriented corporates such as the food aggregator Zomato Ltd, fashion retail company Nykaa, online insurance broker Policy Bazaar Ltd, auto classifieds platform CarTrade.com and CAMS Ltd. The top 25 issuances in the last three years accounted for ₹ 83,300 crore , of which the new-age, tech-oriented corporates have accounted for ₹ 41,800 crore.

The surge in issuances by new age tech-oriented corporates compared to traditional corporates has more to do with value unlocking and brand recognition than the need for long-term assets capex or deleveraging, according to the rating agency.

IPOs from start-ups

Along with a buoyant stock market, the favourable policies have encouraged the start-ups to issue IPOs this year. In March 2021, the Securities and Exchange Board of India reduced the time for which early-stage investors need to hold 25 per cent of the pre-issue capital to one year from two years earlier. The amended regulations, which previously barred corporates that were going public from making discretionary allotments, allow them to allocate up to 60 per cent of the issue size of the IPO to an eligible investor subject to a lock-in period of 30 days on such shares.

A few auto component players have also resorted to IPO issuances in FY22 after a consecutive five years of absence, to fund working capital requirements and repayment of borrowings.

Within the healthcare industry, major issues have been undertaken so as to take up capex activities and reduce borrowings.

FMCG industry has also seen a consistent increase in the IPO issuances in the last five years and the recent uptick can be attributed to international brands such as Sapphire Foods Ltd and Devyani International Ltd who intend to build a retail shops network in India.

A further analysis suggests that the objectives behind IPO issuances (top three), as per issue prospectus, by the top 25 companies (excluding financial services and banks) as per issue size in the last three years were to spend on corporate purposes (26 per cent issuers), funding capex (19 per cent), repayment of existing loans (19 per cent), carry out offer for sale (11 per cent). The intangible benefits of getting listed such as improvement in brand and recognitions were also some of the major drivers.

The rating agency opines that the money raised through IPO has limited impact on leveraging, as most of the entities have issued equity shares for unlocking value. The agency has analysed the top 25 corporates who came out with IPOs during FY18-FY20; the total debt amount (long-term and short-term) of the corporates has not necessarily come down after IPO issuances.

The significant number of issuances in terms of issue size in the last three years, which amount to ₹1.29 lakh crore, is not a harbinger of deleveraging as well as capex. Its utilisation is a key monitorable, it said.