IPOs in India: What’s the Trend about?

By Radhesh Ahuja, Thapar Institute of Engineering & Technology

2021 has proved to be a landmark year for the Startup-space in India. Startups traditionally raise their money through venture capitalists. The total amount of funds raised this year has already crossed 12 billion dollars and many companies are planning to go public to raise more amounts and list themselves on the stock market!

When a privately held company decides to boost capital by issuing shares, it’s called going public. The process of issuing shares is understood as a Public Offer.

Before moving on, let’s study why many major firms are going public in 2021.

The Indian stock exchange has shown strong performance since last year, Sensex and Nifty have almost doubled after crashing in March 2020.

Since 2020, many Indian companies such as Indigo-Paints, Burger King India, and most recently Zomato have listed themselves in the Indian stock market. Going Public helps these firms to increase their capital-raising opportunities and investor base. These companies have generally shown good returns in the market and have been able to raise a lot of funds. Many more companies such as Paytm, MobiKwik, and Nykaa are also planning to go public soon.

The reason we are seeing an IPO boom is twofold. Firstly, the RBI is likely to maintain its policy of low interest rates because our economy is still recovering from the pandemic. This will ensure high liquidity in the economy which in turn boosts consumer spending and investments (although in the longer term it may lead to inflation). The second reason is that the number of investors in the stock market has increased rapidly due to the influx of millions of new customers. This is due to several young people preferring stocks over other alternative investments. Several new investors have been opening Demat accounts and filing applications for the IPOs.

Going public is an important stage for any private company making raising capital and expanding their markets easier for them. The above reasons coupled with the increased optimism in the market have made going public a very attractive option for the new companies right now.

Now that we have understood the reason behind the boom, let’s discuss its prospects for retail investors.

There has been a lot of debate over whether investing in these IPOs is profitable or not.

Many people believe that for any startup, various factors of these companies such as growth in business, market capitalization, revenue, and losses are not clear and hence make their valuation difficult due to which their listing price can often be overvalued. A startup is often a loss-making entity and investing in it solely depends on the future potential of its growth and profitability. Shares of many IPOs often fail to increase substantially over a long period and do not generate profits for their investors.

A report from the Economic Times showed that nearly 61% of the IPOs from 2008 are trading below their listing prices. Many High profile IPOs like those of Coal India, Hindustan Aeronautic limited have shown negative returns. For most of these stocks, Overvaluation and weak fundamentals were the main issues.

On the other hand, many analysts believe that these IPOs have high potential. The only reason a young company makes losses is that it is trying to take advantage of a market with immense growth potential and to expand which will increase the overall valuation of a company. These companies are also backed by many big private equity and venture capital funds and thus have a good future.

Many IPOs such as Apple and Amazon have generated returns as high as 3000% for investors. Furthermore, the IPOs of these startups have seen huge investments from institutional investors thus validating their growth potential.

In recent years, many IPOs such as HDFC Life, ICICI Lombard, Indigo, and even most recently Zomato have successfully listed themselves and there has been a good return on their initial prices for investors. This has in turn helped these firms to expand their businesses and turn more profitable.

Conclusively, we must remember that the majority of IPOs fail to generate substantial returns over a long period and are not profitable for their investors. Lyft, a ridesharing platform has seen its share plummet by almost 36% from its debut at 79 dollars to a price of around 50 dollars per share today. A retail investor must conduct proper research on the business model and market potential of these companies before investing in them.