Even as the pandemic plays havoc with lives and livelihoods, the Indian stock markets, apparently unaffected by it all, have been buoyant—almost as if in a parallel universe. Even the dismal economic outlook has not got in the way of this stock market exuberance. The BSE (Bombay Stock Exchange) Sensex has risen 82 per cent in roughly 15 months, from 29,468 on March 31, 2020, to 53,880 on July 7 this year. According to a State Bank of India (SBI) report, 14.2 million new individual investors joined the stock markets in 2020-21, a year in which the economy was mauled by Covid-19.
That’s not all. The buoyancy of the stock market (also called the secondary market) has set in motion a fundraising spree among corporates in the primary market (where new securities or shares get listed), with 69 companies raising about Rs 75,000 crore through public issues, including an Initial Public Offering (IPO) of shares, in 2020-21. This April-May, 20 companies filed their Draft Red Herring Prospectus (DRHP) with market regulator Sebi (Securities and Exchange Board of India). For FY2021-22, companies are expected to raise more than double of what they did in the previous fiscal. The IPO of public sector insurance giant LIC (Life Insurance Corporation of India) alone is slated to generate around Rs 70,000 crore. “This year will be a record one in the history of IPOs in India,” says Jibi Jacob, MD and head, capital markets, Edelweiss Financial Services. Payments firm Paytm is also reportedly planning a $2.3 billion (around Rs 17,000 crore) IPO and will be filing a DRHP soon.
Companies across a range of sectors have approached Sebi with IPO plans—health firms such as Glenmark Life Sciences and Windlas Biotech; food aggregator Zomato; Devyani International, a franchisee for Pizza Hut, KFC and Costa Coffee in India; Aditya Birla Sun Life AMC; the Wadia Group-promoted Go Air; and chemical firms Clean Science & Technology and Chemplast Sanmar. While earlier, the market witnessed companies bunching up sector-wise—real estate, infrastructure or technology—this time round, the list is completely diverse with no weightage to any particular sector.
Riding the wave
What explains the buoyancy in the stock markets in the midst of an economic slump? The markets have taken heart from various factors, such as listed firms beating all odds to post good performance during the pandemic, the low interest rate regime, the flourishing commodity cycle, the stimulus offered by the Centre and the RBI (Reserve Bank of India), and India’s Covid vaccination drive that aims to cover the entire adult population by December this year.
“Markets run ahead of time. Optimism becomes over-optimism and pessimism over-pessimism,” says Arun Kejriwal, a stock market expert and founder of Kejriwal Research & Investment Services. One of the reasons for the zest in the stock markets is the massive liquidity that the RBI has pumped into the Covid-stricken financial sector, starting March last year when it gave a Rs 3.74 lakh crore liquidity boost to the system. The measures also included a huge 75 basis points cut in the repo rate (the rate at which the RBI lends to commercial banks). A basis point is a hundredth of a percentage point. “The unintended beneficiaries of all these, along with the MSME (micro, small and medium enterprises) sector, were the organised, large companies, who were able to access capital, optimise costs and quickly get back on their feet,” says Sandip Khetan, partner and national leader, financial accounting advisory services, with consulting firm EY India.
The pandemic has spurred a new way of thinking among Indian corporates. Companies have benefited from keeping their costs under tight control. Most have pruned jobs and salaries and put a freeze on recruitments. The other major savings have been on indirect costs. A lot of corporate activity is happening remotely, resulting in big saving in terms of selling, general and administrative expenses. Experts say companies have saved about 3-5 per cent of their total expenditure as meetings shifted to online platforms.
The new breed of investors who began trading from the confines of their homes also helped give the markets buoyancy. As the markets thrived, companies that had been looking to raise capital for a long time found it to be an ideal opportunity. Firms going into listing expect a higher value for shares when the market is trading at record highs, compared to other times. Moreover, in April last year, Sebi granted a one-time relaxation in its primary market fundraising norms to make it easier for companies to raise capital during the pandemic. The Rs 53,125 crore rights issue of Reliance Industries in May 2020 also helped lift the spirits of a market battling the Covid challenge. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
Another reason for the rise in IPOs is the private equity investors, who have been waiting for the right opportunity to exit firms they invested in. These players are at a point where their investments have matured, and the companies they invested in are able to scale up faster and the acceptability of their models has improved manifold during the pandemic. Also called Offer for Sale (OFS), the mechanism allows promoters to reduce their holdings in listed companies in a transparent manner. Unlike the money raised by offering fresh equity in an IPO, which will be used as growth capital by a firm, money raised through OFS goes to investors offering their equity for sale.
Media reports say over the past eight years, of the total issue amount of Rs 1.94 lakh crore raised by 160 IPOs, over 75 per cent (Rs 1.46 lakh crore) was through OFS. “A decade ago, people would have been worried about such exits. But the Indian market is maturing,” says Jacob. Investors look at a business model and check whether a company is raising enough capital for, say, two years of growth and, on top of it, doing an OFS. As long as investors are comfortable with the growth trajectory of a firm, they do not really worry if it is an OFS or not.
Start-up valuation
The markets are watching how the listing of start-ups would go. Among the start-ups reportedly going for IPOs are Paytm, Zomato, lifestyle portal Nykaa, Flipkart and Pepperfry. Paytm, Zomato and Nykaa are ‘unicorns’, or firms with a valuation of over $1 billion (about Rs 7,400 crore). While many of these start-ups have amassed scale, most are yet to turn profitable.
How will the stock markets, where profits and performance of companies will be scrutinised threadbare, value these companies? The general view is that investors are going to value start-ups depending upon how dominant they are in the space that they are operating in, how much access they have to capital, and their ability to continuously acquire market share. “If they (start-ups) are successful, a lot of capital is going to come to India, and then we don’t have to go outside India to raise money,” says Khetan.
When start-ups were founded, they were disrupting the incumbents and have now become sizeable players in their areas of operations. Public markets will need a visibility as to when these companies will break even and make profit or some of the key performance indicators need to be redefined for appropriate valuation of these companies in future. As long as that is assured, start-ups too become attractive.
Retail investors’ concerns
Experts have a word of caution for investors looking to subscribe to IPOs. “Someone not investing in the right quality of stock or not looking at governance may end up with disappointing returns,” says Khetan. “However, it is important for the country for continuous financialisation of people’s savings, in a structured way, and with a long-term view.” Other asset classes, including real estate, gold or interest on savings, have not given such significant returns over a period of time, he adds.
The general advice from experts is that if retail investors have concerns regarding a particular stock, they should stay away. “Move to large caps (big and well-established companies) where there is safety. You don’t have a single large cap company which doesn’t have a brick-and-mortar play, be in FMCG, IT or pharma. They have tangible businesses and customers,” says Kejriwal, adding that dabbling in new ventures should not be at the expense of a retail investor’s core investment. Even small investors need to balance their portfolios and should have stocks that give steady returns. It is not advisable to put the entire investment in the high-risk, high-return portfolio.
Most experts believe that the highs in the markets are sustainable, and even if a correction happens, the markets will remain at levels better than last year. The upcoming IPOs, while giving investors a chance to be part of promising firms, will also be an acid test of their real value as assigned by their shareholders.