The pandemic has led to limited options in non-equity asset class for the investors and hence we have witnessed frenzied buying during the past 15-odd months. This euphoria has been instrumental in large number of start-ups among other companies tapping the capital market with their initial public offers.
To add further momentum, the fundamentals of the capital market (which are characterized by lower interest rates and bond yields, immense availability of liquidity and higher participation by the retail investors), since the second half of 2020, are positive across the globe.
To put it in perspective, during pandemic 1.42 crore fresh individual demat accounts were opened in the financial year 2020-21.
The scenario prevailed globally and India too was not far behind in this IPO boom. Despite the COVID-19 crisis, Indian companies have raised a whopping Rs. 1.9 lakh crore via the primary market route, which was the highest in any financial year and was equally supported by a vibrant secondary market.
Foreseeing a healthy equity market outlook, many companies have lined-up their public issues. Several companies across sectors like food services, chemicals and even startups are planning to go public in 2021.
With interest rates likely to remain lower in the near-term, we feel that this momentum is far from over as those lined up to raise funds include Life Insurance Corporation of India with an intent to alone raise Rs 50,000-80,000 crore.
Recently, Zomato’s IPO of Rs. 9,375 crore was well-received by the market. More such tech-companies like PayTM, MobiKwik etc. are looking to raise public money so as to expand their business as demand grows post-pandemic. According to various media reports, over half a dozen tech-companies are currently in discussion to go public via IPO route in near to medium term.
A key observation from the rising IPOs is not that startup companies are over-leveraged and are raising funds to reduce their debt, but it is more to drive growth as also give an exit to the anchor investors in the start-up companies. A case in point is Zomato IPO where an anchor investor sold stock worth Rs 375 crore.
Given their business scalability and ability to grow rapidly, these startups demand higher valuation as compared to other conventional companies. Presently, profitability remains a concern, but over the period these companies can graduate themselves to profitable and sustainable businesses.
Since most of the startups are loss-making, the capital market regulator has not allowed the retail investors to participate beyond 10 percent of the issue size. Initially, such IPOs will be more suitable for the institutional and certain section of retail investors, but as the startup ecosystem gets evolved and stabilizes there will wider acceptance from the general investors.
The listing of the Zomato public issue will be like testing water for the startups in India and could set the trend for many more to come by.
(Rajnath Yadav is Research Analyst at Choice Broking)
