Will the IPO Boom End in 2022? It could if...

Are the golden days of making easy money in initial public offerings (IPOs) over?

At the end of 2020, no one could have predicted that 2021 would be such a prosperous year for IPO investors.

It was a record-breaking for the IPO market in India and around the world.

Around 2,388 IPO deals mobilised US$453.3 bn globally in 2021. This was 60% more in terms of volume and proceeds compared to 2020, as per Ernst & Young global IPO trends report for 2021.

In India, 63 firms raised a total of Rs 1.2 tn through IPOs. This was more than four times the amount raised in 2020 (Rs 266.3 bn).

Looking ahead, it appears the IPO frenzy is far from over. The primary market is seeing hectic activity these days.

IPO pipeline for the year 2022

A slew of well-known firms from the insurance, technology, and healthcare, are poised to dominate the IPO market in 2022.

Several companies have received approval from the market regulator for their IPOs, including Delhivery, Go Airlines, ESDS Software, Skanray Technologies, Emcure Pharmaceuticals, Tracxn Technologies, Fusion Micro Finance, MobiKwik, and many others.

And among the upcoming IPOs in India let's not forget the biggest one of all - Life Corporation of India (LIC).

LICs' IPO is expected in March 2022. After the listing, LIC will be among India's biggest public companies alongside giants such as Reliance and TCS.

It will be India's largest public issue and will test the capital markets at a time when global stocks have lost US$5 tn.

The upcoming tech IPOs are already facing a reality check now that the recently listed, new-age companies, have taken a massive hit in the market.

Prominent names such as Oyo Hotels and Delhivery are pushing back their public debuts and are thinking of lowering their IPO valuation targets.

Foreign institutional investors (FIIs) have withdrawn money from Indian stocks for more than four months now. Local investors are still suffering from the losses made on high-profile IPOs last year.

Company name	Current share price	52-week high	Change %	Marketcap loss since high (Rs in bn)
Paytm	869	1,961	-56%	700
Zomato	85	169	-50%	690
Nykaa	1,530	2,574	-41%	500
PB Fintech	780	1,470	-47%	320

Source: Equitymaster

In terms of marketcap, these companies jointly raised Rs 390 bn and then erased Rs 2.2 tn from record highs.

Following the disastrous performance of Paytm, as well as the thrashing experienced by newly listed e-commerce companies Zomato and Nykaa, investors have turned their backs on new tech offerings.

Now can we still anticipate the IPO boom to continue in 2022, despite slowing market trend, geopolitical concerns, and rising inflation? Is it the best time for companies to go public?

And if not, let's find out why...

Current market scenario

The major concern for markets currently is inflation and the anticipated rate hike by the US Federal Reserve.

US inflation rate surged to a 40-year high of 7.5% in January as strong consumer demand collided with pandemic-related supply disruptions.

Moreover, the threat of conflict between Russia and Ukraine continues to rattle stock markets.

The interest rate hikes along with slowing GDP growth, and geopolitical tensions have sent global equities tumbling.

These global factors impacted the domestic markets as well. Investors are worried about the flow of money out of the markets.

This unfavourable sentiment can impact the primary market as well.

So far, only three public issues have hit the market since the start of the year. These include AGS Transact Technologies, Adani Wilmar, and Vedant Fashions.

Half of the 63 IPOs in 2021 have dipped below the listing price. About a dozen have slid below the offer price. Among the wealth destroyers, new age companies are at the forefront.

Newly-listed firms bleeding

Due to an aggressive sell-off, shares of newly-listed businesses like Zomato, PB Fintech, and Nykaa have plummeted to new lows.

India's pioneering digital payments start-up Paytm hit a series of lows in the recent past.

The stock of the company has eroded more than half of IPO investors' money in less than three months. It's down about 60% from its IPO issue price of Rs 2,150.

The damage has increased because many of these firms had market values higher than their fundamentals permitted.

The valuation game in India

When it comes to investing in IPOs, it appears that size does matter.

Think about it...

The number of internet-based companies seeking to go public is increasing every day.

Despite making smaller profits, or no profits at all, these firms seek very high valuations than their traditional, listed competitors.

If the trend continues, there is a very high possibility that the market won't support these high prices going ahead.

After the poor performance of these so-called 'unicorns', retail investors have become cautious and aware about their investments.

According to reports, the hospitality start-up, Oyo Hotels & Homes may explore the option of re-filing the draft red herring prospectus (DRHP) with the market regulator.

Changes in Oyo's IPO plans come at a time when globally and domestically there is a correction in the valuation of tech stocks.

This shows the market's trend is shifting. New IPOs won't be priced at the same high levels.

To ensure this, the market regulator has approved several new measures to further reform the IPO market in the country.

Investors shy away from IPO market on uncertainty

The recent performance of Indian IPOs has not been encouraging.

Looking at the recent IPOs in India, the post-listing performance in the second half of 2021 was lacklustre. This is partly to do with the aggressive IPO pricing and partly to do with market uncertainties.

As a result, investor enthusiasm for IPOs has waned. This has made the primary market less liquid in the last few months.

Further, FIIs are on a selling spree across most emerging markets, including India.

They have sold Indian equities worth over US$7 bn thus far in 2022 - and over US$11 bn since October 2021, when they started to unwind positions here.

The nervousness is also seen in IPO markets as very little to no exposure was taken by FIIs.

The bottomline

It seems the days of excessive liquidity in the Indian markets are over due to FII selling pressure.

The factors behind the FII selling are liquidity-tightening policies taken by central banks the strengthening of the dollar, and rising inflation.

As central banks cut their bond purchases, the financial system becomes less liquid, and interest rates begin to climb.

As a result, many investors are pulling money out of riskier assets like emerging markets and putting it into developed market bonds.

Inflation is also bad news because it causes central banks to raise interest rates. Earnings decline when interest rates climb. As a result, investors are no longer prepared to pay high values and are beginning to withdraw funds.

This could affect the Indian IPO market as well as secondary markets.

Investors must be cautious and evaluate many aspects before investing money in an IPO.

It's important to remember that, like the stock market, IPOs come with risks. Due diligence is essential before investing in them.

There are some precautions you can follow before investing in IPOs. These include studying the company's business, reading the prospectus, and understanding its financial health.

Also evaluate the post-listing valuation of the stock, the background of the promoters, the key management team and all the risk factors.

In the long run, a knowledgeable and well informed investor always wins.

Happy Investing!