The initial public offering (IPO) of the Life Insurance Corporation of India has revitalized the primary markets in India, despite the volatility in stock markets across the world. The LIC IPO brought many investors to hit the apply button in the IPO amid an uncertain phase in stock markets. This largest IPO of the Indian market is expected to drive away the dull sentiment in the Indian primary market going forward.
Volatility and IPO market:
Before we get into what to expect from the upcoming IPOs of 2022, it is equally important to understand why there is a sudden slowdown in the IPO pipeline in the first quarter of CY2022.
The CY2021 ended on a positive note, but the CY2022 has triggered mixed reactions among commentators and investors. Ultra-loose monetary policies worldwide to boost the economies had set the stage right for surging inflation. The war between Russia and Ukraine has pushed up energy prices. Lockdowns in China to contain the new wave of Covid-19 pandemic have severely impacted supply chains. These factors have led to historically high inflation. The central bankers have been resorting to tight monetary policy to contain inflation. Increasing interest rates across global markets and more specifically in the US, became a concern.
In the US, inflation is highest in the past four decades. No wonder, the US Federal Reserve adopted strong hawkish view. So far policy interest rates in the US are hiked by 75 basis points. And the money market participants estimate rates to go up by at least 100 basis points from here before the end of the year. This has made money dearer. This has also caused a lot of volatility in global equity markets as money flows back not only from emerging markets to the US but also to debt markets from equities.
When interest rates go up, investors find bond yields attractive. The valuations of the stocks go down, as investors’ preference changes with falling risk appetite. No wonder, the IPO market turns dull in a situation where raising money becomes difficult.
But India’s stock markets have been relatively resilient thanks to the expectations of strong economic growth and relatively less inflation in Indian economy. The LIC IPO may infuse new life in the Indian primary market. Besides this, there are recent developments which indicate some prominent companies entering the primary market. Recent news items of IPO plans by Mukesh Ambani led Reliance Industries for its subsidiaries—Reliance JIO and Reliance Retail—can further boost investors’ confidence. Though there are no official statements offering details of fund raising by these subsidiaries of Reliance Industries, the IPOs of Reliance JIO and Reliance Retail can not only bring back many retail investors but also attract many foreign investors looking to participate in India growth story.
Other prominent names that may go public in the second half of the CY2022 may include Sterlite Power Transmission- a Vedanta group company, B9 Beverages – the producers of Bira alcoholic beverages and financial services sector companies such as Care Health Insurance, Hero Fincorp and the National Stock Exchange of India. Some of these are reputed brands and many investors may want to invest in them.
In last two years some IPOs of new-age companies like PayTM, CarTrade, Zomato were well-received by investors. Both individual and institutional investors invested in these companies. The anchor investors’ lists of these IPOs had marquee global names. India growth story and its digital edge were two tempting reasons behind strong response of IPOs of these new-age companies.
IPOs of some companies in specialty chemicals and niche businesses with pricing power made money for investors. While some of these returns were attributed to better growth prospects on the account of opportunities arising out of China plus one theory and the production linked incentives policy of Government of India, much of the alpha was an outcome of the central banks’ stimulus fueled broad-based rally. Though many IPOs went through in a risk-on environment, investors benefited from IPOs of a few companies with strong fundamentals. However, the situation is changing now.
The Upcoming IPOs in 2022 can be a great hook for many investors to invest in equities. They bring in more investment opportunities to make money as they are companies which have huge brand recall and their services cut across consumers’ profiles. They also offer diversification for investors’ portfolios.
What to expect?
Now, it is important to understand the link between liquidity in financial markets and the performance of primary market in equities. When the money is flowing free, risk appetite of investors is high. Investment bankers can price IPOs a bit higher than they usually would do. There are also many takers for stocks post their listing, which many times lead to bumper listing. But when central bankers adopt tight monetary policy, which is the current situation, the premium investors are willing to offer falls.
The upcoming IPOs of 2022 will have to consider ‘yield focus’—the preference for assets offering better rate of return on money invested than mere hope of future earnings. Many investment bankers may price IPOs a bit conservatively if they really want to attract the right set of long-term investors. Even investors should note that easy money in IPOs (as well as in stock markets) is probably no longer the situation. Investors have to assess each upcoming IPO in 2022 with utmost diligence. Loss-making businesses or businesses with poor fundamentals and companies with leveraged balance sheets must be avoided. New-age businesses too may have to come with elaborate plans about sustainability of their business. Even the regulator – Securities & Exchange Board of India (SEBI) has already proposed a new disclosure framework for loss-making companies opting for an IPO.
Hence, it is important to consider investments in companies with strong fundamentals, high brand recall, reasonably good balance sheet and high visibility of earnings in the coming years. Investors should consider investing in an IPO only when these criteria are fulfilled.