The IPO landscape in 2020, and what we can expect in 2021
Ask any analyst or investment banker and they’ll tell you that 2020 has been a difficult year to read in terms of money-making opportunities the capital markets presented.
The COVID-19 pandemic set off a brief period of derisking in the global equities market, with stocks in the US, Europe, and Asia plunging in the April to June quarter as investors moved to the sidelines.
Some held on to capital, while others traded risky investments in for safe havens such as treasury bonds and silver — which, by the way, hit a seven-year high in August, at $28.32 per ounce, after nosediving to a whopping 11-year low in March, just before most nations closed their airspaces and imposed nationwide restrictions.
India’s S&P BSE Sensex Index, which tracks the 30 largest and most actively traded stocks, on March 24 plummeted to its lowest in 3.3 years.
Recovery set in around mid-June after the government announced stimulus packages to make it easier for the country to do business and relaxed FDI norms.
Even though the Indian stock market has managed to recover most of its losses in the middle of the year — in fact, the main indexes hit fresh highs last week — institutional investors have been a little wary of getting into the market too fast, and many have advised clients to not invest in fads.
This cautiousness has spread to other parts of the markets too, especially IPOs.
The IPO landscape in 2020: Unwilling participants or true believers?
Although the IPO market has been slow to convalesce — in the first quarter of 2020 (between April and June) only 19 companies listed on the Bombay Stock Exchange, as opposed to 39 in the year-ago quarter — companies that had withdrawn or delayed their IPOs are now returning to the market.
Between June and October — the latest data present on the BSE website — 46 Indian firms listed on the bourse, compared with 27 a year ago.
IPO collections till September-end were almost twice that of 2019, which could be the best year on record in the last decade, if you were to remove the seven insurance companies that went public in 2017, according to an IIFL Securities report.
Total IPOs in FY 2020 (April to October), vs comparable periods in FY19, FY18, FY17. BSE has not recorded November 2020 listings yet.
Companies such as, Mazgaon Docks, Happiest Minds Technologies, and Burger King India, among others, saw multifold oversubscriptions, and nearly all IPOs were priced at the upper end of the price band.
Even after listing, most have continued to sail through smoothly, in line with gains in the broader markets.
But what concerns market watchers and investors today is whether these IPO buys are based on the fundamentals of the companies, or if these are profit-taking moves by promoters and retail investors.
Retail investors, in particular, have skewed the markets marginally.
This new breed of investors — aka ‘Robinhood’ investors — are mostly people who took up online trading via emerging platforms such as, , , Upstoxx and others during the pandemic-induced lockdowns.
With more time on their hands, increasing awareness of cost-effective online trading platforms, and a collective push by these startups to get more people to “grow their money even when they’re asleep”, mom-and-pop investors have flooded the markets. Market watchers suspect they’re buying the blingy, flashy stocks, thereby artificially pumping up their share prices.
Take Burger King India, for example. After an oversubscribed IPO, a stellar debut, and four days of solid gains, the stock plunged nearly 10 percent on Thursday and Friday. Typically, these moves are seen in instances of profit-booking by intraday traders, which retail investors quintessentially are.
Despite short-term gains, the market is largely still looking at solid businesses with robust balance sheets that are insulated from broader industry fluctuations.
IIFL cites two examples to illustrate the long view IPO investors are taking today:
- Mazgaon Docks, which was oversubscribed nearly 150 times the issue size, was available at less than seven times its P/E ratio, even though it had an order book position of Rs 50,000 crore.
- Angel Broking and Likhitha Infrastructure, on the other hand, incited serious valuation concerns. Both had lukewarm debuts when they started trading.
Overall, even though COVID-19 did have a significant impact on the IPO market, new listings raised nearly $3.5 billion this year, to date, compared with $1.74 billion in the year-ago comparable period, according to data by PGA Labs.
All these signals point to the fact that the IPO markets — much like the dolphins sighted in River Ganga during the lockdown days — remained undeterred by the coronavirus.
Happy sectors, sad sectors
Sectors that outperformed in the IPO markets this year included technology and healthcare. Route Mobile, Happiest Minds Technologies, Rossari Biotech, and Gland Pharma saw solid IPOs and debuts, and were among the biggest IPOs overall in 2020.
“The IPO market is showing a preference for emerging business ideas with a futuristic tweak,” IIFL Securities said in a note, adding companies like Happiest Minds and Route Mobile were two good examples of tech plays where value creation could be exponential.
On the other hand, financial sector stocks did not receive too warm a welcome. SBI Cards and CAMS saw good traction during their IPO allotments, but their performance has been lacklustre post-listing. Angel Broking and UTI AMC sales saw a lukewarm response to their IPOs, and haven’t fared very well in market trading either.
Investors have also been gung-ho about REITs given the crash in the commercial real-estate sector.
What’s in store for the IPO market in 2021?
In 2021, healthcare, technology, and IT services stocks will remain in focus as the world adapts to a new way of life. The imminent arrival of the COVID-19 vaccine could boost the infrastructure sector too as companies set up cold storage facilities.
LIC, Kalyan Jewellers, Grofers, Lodha Developers,Education, Barbeque Nation, NSE, and JSW Cements are some notable IPO hopefuls expected to come very soon — if not in December, at least as early as February.
On the balance, investors seem excited about IPOs in the new year with several prominent startups expected to head to the capital markets soon, along with other well-established businesses.