IPO market may undergo phase of consolidation in fear of a recession in 2023

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IPO fundraising has significantly reduced. In CY21, the total IPO raised was Rs 1.33 lac crore, compared to Rs 0.6 lac crore in CY22. Barring LIC, we did not see any big-ticket IPOs hitting the primary market in 2022.

This is because the world economy slowed down, bringing high volatility to the stock market. This disturbed the sentiment of the primary and secondary markets affecting the pricing of stocks and discouraging promoters and private investors to come to the market for listing.

A similar effect is felt by investors as appetites are reduced during the year. Availability of liquidity decreased as inflows from institutional and retail investors dropped due to the subdued performance of the current portfolio cutting churning and new investment plans. Due to the global risk-off, FII inflows also reduced.

Corporates in India have de-leveraged in the last 3-5 years, while private CAPEX has been moderate. At the same time, cash generation has become decent reducing the need for external funding.

Corporate profit as a percentage of GDP has doubled, and the Nifty 500 index PAT to GDP ratio increased to 4.4% in FY22 from 2.5% in FY19. In CY23, the majority of IPOs were for OFS and listing benefits rather than for opex and CAPEX.

Corporates have lost the allure to fund through equities due to low valuation affecting prosperity for company, promoters & private investors, suggesting high dilution of capital.

While funding in the debt market is decent due to lower interest costs as rates continue to be at a low base.

It has become attractive for investors due to an increase in yields. India’s one-year corporate bond yield has increased to 8.1% from 6.8% in a year.

In CY20 and CY21, HNIs were very active in anticipation of listing gains. HNI used to apply substantially, taking support from external funding sources like NBFCs.

As the possibility of sharp listing gains reduced in 2022, HNI’s action has reduced during the year.

The outlook for the IPO market in 2023 is presumed to be muted in anticipation of a volatile stock market on the cusp of a recession fear.

There is a plausibility that the level of premium valuation India used to garner can reduce in 2023, affecting the pricing of IPOs. MSCI-India is trading at a 90% premium to MSCI-EM.

The weak performance of recent IPOs will also have a hindsight effect on the investors, reflecting a weak response.

The important factor that will govern the trend of the IPO market in 2023 is firstly, to have a strong secondary market, for that, the global market should be healthy. Supportably, the global market has become attractive after the correction of CY22. However, it is undergoing a phase of consolidation in fear of a recession in 2023.

Based on the recent rapid drop in inflation, the risk of a recession is moderating. If this trend continues, the monetary policy will become more accommodative in the future, which will be a strong trigger for the market.

However, we are far from the equilibrium point, reflecting a wait-and-watch approach in the short term with a mixed bias.

Secondly, as India is expected to be in a long CAPEX cycle triggered by reforms focusing on manufacturing hub; we should expect a high amount of funds required for corporate in the future.

In the short to medium-term, other factors like the outcome of the union budget – 2023, the general election in 2024, and the continuation of reforms are the local factors that will affect the IPO market.

First published in The Economic Times

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