IPOs – Initial Public Offers in 2016: Comparison with 2015 and the way ahead

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IPOs – Initial Public Offers in 2016: Comparison with 2015 and the way ahead

 

One of the many ways to raise capital for a business is an Initial Public Offering or an IPO.  Many of you might be having questions – what is an IPO?  An IPO is the first time a company issues equity to the public. Basically, an IPO is one kind of public offering in which a company which was initially privately held decides to go public. The company does this by issuing “shares”.  A share is basically a portion of the company’s capital which entitles its holder to a proportion of the profits made by that company. The shares issued by the company are first bought by institutional investors via an investment banker who then sells it to the public in the stock market/exchange. Now the shares are bought and sold among the public investors and freely traded in the market.

Now that we have a basic idea of an IPO, let us see how an Initial Public Offering is made available to the public.

Firstly, when the company decides to go public, it will hire an investment banker or a group of bankers. They function as underwriters which means that they give a guarantee to the company that they will buy all its shares on the day the IPO is made. These bankers get a commission on the total amount raised because they have risked their own capital for buying the shares.

Next, the company files a registration statement with the concerned governing authority – in India it is the Securities and Exchange Board of India (SEBI) – giving all its financial information. The company is investigated by the authority and then the final date for the IPO is set. A prospectus having the important details about the company is made. This is known as ‘Red herring prospectus’.

Now because the investment banker has given the guarantee for buying all the shares, they are the market makers for that IPO. They find out the prospective institutional investors who will be willing to buy these shares. For this purpose, a road-show is conducted in which the CEO and generally even the CFO of the company is taken across the country to give a presentation of the company’s plans so as to attract the investors. This is usually the “marketing part” of the IPO. This can be done online as well for smaller companies. A bigger company will generally have larger and more hyped road-shows to make the IPOs more appealing. Finally, as the set date of the IPO comes closer, the appointed bankers will decide the highest possible price of a share that they can get from the IPO taking into consideration the company, the demand and the prevailing market conditions.

On the day of the IPO, the bankers buy all the shares and sell them to the institutional investors/clients. This is called “primary market”. If any of the clients withdraw their subscription, then the investment banker will own the share or try and sell it to someone else. Once all of this is done, finally the shares are released for trading in the stock market which is the “secondary market”. They are sold to the general public, via the institutional investors. The first trade determines the demand of that stock in the public market.

IPOs have been a popular way for raising capital for business and also for increasing the liquidity. Going public also helps a company in mergers and acquisition as the company can issue shares now. It is also used as an exit option for many start-ups. Since years, numerous IPOs have been released and made available to the public.

IPOs in 2015, and way forward in 2016

The last year – 2015 – saw a remarkable increase in the number of IPOs issued in India. A total of 21 IPOs were issued in 2015 as compared to just 5 IPOs in 2014, 3 in 2013, and 11 in 2012. This upward trend is expected to continue in 2016 as well. The biggest IPO in 2015 was by InterGlobe Aviation, the operator of Indigo Airlines and it raised over INR 3,000 crore. Coffee Day Enterprises which is the owner of India’s largest coffee chain – Cafe Coffee Day (CCD) – also issued an IPO in October, 2015 which raised INR 1,150 crore. Three of the top 10 IPOs in 2015 came from pharmaceutical and healthcare sector companies. This is because this sector is seeing a lot of growth and reorganization and the momentum will continue in the following year.

Professionals claim that the reason behind such a peak in the issuances of IPOs in 2015 was due to the pent up demand for investing in the public market. After four disappointing years, the investors were really looking forward to the equity market. Also most of the retailers investing in gold and real estates switched to equity because of the underperformance of the former. Adding on to this, the economic reforms sought by Prime Minister Narendra Modi also encouraged both the foreign and domestic investors in India. The P/E ratios of companies in the market was really high, signifying that the companies were highly valued by the market and it was the right time for them to issue the IPOs. The general sentiment in the market was also very favourable towards these companies. All of this made 2015 the most successful year for IPOs and the Indian firms raised a total of nearly INR 14,000 crores, a nine-fold increase from 2014.

This trend is bound to continue in 2016. A major part of the listings will come from the new economy companies from diverse sectors like biotechnology, fin-tech and e-commerce, which are currently seeing a booming growth. The net worth that all the IPOs set to raise in the year 2016 is an enormous INR 50,000 crore! SEBI has already granted approvals to 18 companies on the main board and some 30 companies on the SME platform. Till date, (May 2016) 14 IPOs have already been issued in 2016 of which the major ones from the healthcare and pharmaceutical sector were from the companies: Narayana Hrudalaya in January, Healthcare Global Enterprises in March and Thyrocare Technologies in May. The IPOs from fintech side were Quick Heal Technologies in February 2016 and Ujjivan Financial Services in May 2016.

 

The biggest IPO in 2016 is expected to come from Vodafone India which is currently in talks with various Indian and foreign investment banks for its underwriting requirement. It estimates to raise around $2-2.5 billion from the IPO. This will the largest private-sector debut after the IPO made by Reliance Power which raised $2.8 billion in 2008. HDFC Life is also set to sell 10% of its shares to the public, making it the first insurer to go public. It plans to raise around $300 million through this IPO which is scheduled in mid-2016. We also have L&T Infotech which is currently filling the registration statement to the SEBI for going public. This IPO might also be issued in 2016.
The market is currently going bullish and looking at the prevailing conditions, we can expect more IPO issuances. Although the rest of the Asian market is looking quite dull in the perspective of IPO issuances, India seems to be a bright spot. However, it also means that the market is overvaluing the companies and that might prove to be risky. The momentum in IPO could stall if the government fails to bring about the key economic reforms that it promised especially a new law aimed at harmonizing all state level taxes. The current market and investor sentiment is highly relying on these economic reforms and should that crash, the IPO market will also heavily suffer.

We hope you enjoyed this article and got a glimpse into which IPOs are in pipeline in 2016. Do subscribe us via Email and we will deliver our next article, right in your mailbox!