It was a bumper year for IPOs in 2021. 63 companies had IPOs and raised around Rs 1 trillion from the Indian markets. The option to invest in IPOs for the Indian investor was limitless with innovative startups and legacy companies. The beginning of 2022 was no different. The Indian stock market launched India’s biggest-ever IPO with the Life Insurance Corporation of India (LIC) in May 2022. Many other companies queued up to follow suit.
The Indian IPO Markets Take a Breather
While the LIC IPO launch created the expected frenzy among investors, much of the market buzz died down over the next few months. So is the IPO market dead?
Debashish Purohit, Co-head of India investment banking at the Bank of America, disagrees. He believes the Indian IPO market will bounce back in six months.
Here are the top 3 reasons why
1. The Primary Strength of the Indian Equity Markets
According to the Bank of America, India’s initial public offerings market is expected to resume the 2021 momentum as early as the first quarter of the upcoming 2023-24. This boost is expected primarily from the underlying strength of the markets.
2. The Chance of Resale of Existing IPO Shares
Debashish Purohit from the Bank of America believes IPOs launched in 2021 and the first half of 2022 has paved the way for secondary shares sale. It, in turn, allows existing stockholders an opportunity to monetize their stakes.
3. Merger and Acquisition to Act as Market Boosters
Most Asian markets are experiencing a 70% slump compared to a dip of 40% in the Indian equity capital market in the fiscal year 2022-23.
Purohit, from the Bank of America, is confident that the market driver going forward will be critical mergers and acquisitions. He expects this will be the force that consolidates core consumer-facing sectors such as consumer internet-based companies and financial services.
Bank of America deems that the bulk of the merger and acquisition activities will be centered on industries that are net-capital importers. The sectors expected to witness traction and movements because of this activity are energy transition, infrastructure, food, and beverages. Healthcare will also be a core segment as global pharma giants are looking to significantly diversify away from the Chinese markets by investing in Indian supply chains.
Planning Your Investment for IPOs in 2023
Debashish Purohit from the Bank of America paints a promising landscape as far as the IPO market in India is concerned. Therefore, this opens an avenue of investment opportunities for retail investors in India that requires some planning.
First-time IPO subscribers must know the specific aspects of IPO investing that will help them gain a strong foothold when the initial public offering is launched. Like any form of investing, an investor must assess the viability of the business idea for any company that is IPO bound.
Moreover, the company should offer a host of compelling reasons that will drive the confidence of the prospective investor to participate in the public offering. This foundation stems from trust and belief in the business’s potential to consistently deliver high-quality products and services to its customers. Keeping in line with the expected rally of IPOs down the line as per the Bank of America, here’s an IPO checklist that can help you plan ahead.
1. Go Through the Annual Company Performance:
Digging on your own can be difficult in this instance as you are still researching a private company, an entity that is not obliged to reveal much in the public domain. However, the company will release its year-on-year performance on its website, which you can access.
The business is performing well if the company’s financials show consistent annual growth. However, keep an eye out for the odd spike in revenues and sales as the IPO launch draws closer.
2. Check Promoter Backgrounds and Management Team
For many company promoters, an IPO launch can be an exit window. So do your due diligence, and ensure that you thoroughly check who is running the company. It includes assessing their experience, professional background, and the average years they devoted to the company.
Be sure the check the profiles of the management team. Understanding who has the potential to run the business operations and drive growth for the company can be an essential deciding factor if you want to invest in the company’s IPO.
3. Read the Draft Red Herring Prospectus (DRHP)
You must dedicate ample time going through the draft red herring prospectus carefully. It is the only document that all companies are about to launch their IPOs release.
It can be a dry read for sure, but the document does offer a lot of insights into what the company has to offer while outlining the risks and future opportunities for its investors. It will give you a comprehensive understanding of why the company has opted to go public at this stage of its journey.
4. Understand the Utilization of the Proceeds
The DRHP also shares information on what the company plans to do with the money it raises through the public issue. As a result, it gives investors an insight into the objectives and long-term goals of the company. For example, if most of the proceeds are intended to pay off company debt, it may not be an attractive investment opportunity.
Are IPOs the Right Investment Strategy for You?
IPOs are a great way to get your skin into the game early. Whether it is the right investment opportunity for you is a decision only you can make. Given the future potential, according to experts from the Bank of America, those who are skeptical and cautious have a better chance of faring well.