A company’s journey to IPO is analogous to that of an airplane preparing to take flight. To have a safe liftoff and a steady flight, all commuters must be positioned and onboard (key stakeholders), the runway must be streamlined (to be ready), the climate must be inspected (geopolitical and wider market trends), and the financial and operational acumen must all be taken into account. Most importantly, it pulls all variables together.
Similar to the global IPO market, geopolitical issues, inflationary pressures, and an increase in interest rates have slowed IPO activity in Indian capital markets. Globally, India ranks fourth in terms of the number of IPOs (49), and fifth in terms of proceeds raised in the fiscal year 2022.
Earlier this year we observed the IPO of Life Insurance Corporation of India (the largest in Indian capital market history), which was met with poor post-IPO performance due to a variety of issues. This hasn’t stopped other companies from considering the IPO route.
Timing is crucial, as is being ready to take off during the momentum. Many companies are continuing to prepare plans for an initial public offering (IPO) later this year or early next year, assuming favourable year-end March 2022 results.
According to the historical experience of 50+ recent IPOs, companies can take at least 8 to 12 months to IPO, with SEBI approval taking an average of 3 to 4 months.
In 2021, we saw that out of 64 firms going public, 50+ gained permission 2021, with an average of 3 months to receive SEBI approval from their DRHP file. Due to the favfavourablerket conditions, approximately one out of every four companies (25%) re-filed their DRHPs in 2021 and received clearance and a list in the same year. This was aided by market momentum and considerable liquidity. In a single year, the BSE Sensex rose by nearly 10,000 points.
Building a compelling equity story, the timely appointment of relevant stakeholders, improving corporate governance, and adequate legal and capital structure presence are all part of the IPO preparation process.
Businesses must also go through the audit process, restate financial data (including quarterly reports), engage in the comfort letter process, complete legal/bank fact checking, and eventually perform investor promotional events, in addition to book building and price discovery. All of these processes can take anywhere from 6 to 9 months.
There is a significant pipeline of IPOs scheduled for the second half of 2022. In Q2 of 2022, 10+ firms filed their Draft Red Herring Prospectus, 40+ companies have already received SEBI approval (deliberating stronger valuation/market conditions), and 50+ companies are awaiting approval.
On a larger commercial and investment level, India has one of the fastest-growing start-up ecosystems in the world.
Most of these are platforms (Tech-enabled) enterprises, such as fintech, consumer internet, and education technology. While there is a solid base of these developing platform companies, they are still in their infancy and the majority are losing money. Investors are being cautious with private equity and major funds and are decreasing their investment spending from an investment standpoint. Many corporations have recently reduced the size of their first public offerings (IPOs). There is a behavioural shift occurring, with investors likely favouring profit-making companies (with excellent cash flows or a clear route to profitability) rather than loss-making (many platform/Tech-enabled) companies.
Because take-off is only the first stage and not the last destination, successful firms use IPO as a springboard to additional milestones and greater success rather than a monetization event. While recent market volatility and unfavourable inflation and interest rate increases pose a short-term challenge, they may be overcome with robust company models, established cash flows, and rigorous planning for the path ahead.