Strong H2 2022 IPO pipeline, stick with for-profit companies, stay cautious
By Sandip Khetan and Veenit Surana
The journey to a company’s IPO is similar to that of an airplane planning to take off. All passengers must be lined up and on board (key stakeholders), the runway must be optimized (in terms of readiness), the weather must be checked (geopolitical and broader market conditions), and financial and operational prowess must all be considered to have a safe take-off and a scheduled flight. Above all, it brings all the factors together in a cohesive manner.
Like the global IPO market, Indian capital markets have seen a slowdown in IPO activity due to geopolitical factors, inflationary pressures and rising interest rates. Globally, India ranks 4th in number of IPOs (~49) and 5th in proceeds raised in the year 2022. We recently witnessed the IPO of Life Insurance Corporation of India (largest in Indian capital market history) which met with poor post-IPO performance due to various factors. That hasn’t stopped other companies from exploring IPOs.
Timing, being ready to take off during the run-up, is key. Many companies continue to prepare for an IPO later this year or early next year, based on favorable March 2022 results.
Based on historical experience from more than 50 recent IPOs, companies can take at least 8-12 months for IPO, with SEBI approval consuming 3-4 months on average. In 2021, we found that out of 64 companies that went public, more than 50 companies received approval in 2021 even with an average duration of 3 months to receive SEBI approval of their DRHP dossier. About 1 in 4 companies (25%) refiled their HRDs in 2021 due to favorable market conditions and managed to receive approval and listing in the same year. This was supported by market momentum and high liquidity. The Sensex has gained about 10,000 points in a single year.
Preparing for the IPO involves building a compelling equity story, timely appointing various stakeholders, improving corporate governance, and having the appropriate legal and capital structure present. . It is also imperative for companies to go through the audit process, restate financial information (including quarterly results), participate in the comfort letter process, go through legal/banking due diligence and finally conduct investor road shows as well as book building and price discovery. . All of these processes can easily take 6-9 months.
There is a strong pipeline of IPOs in the second half of 2022. Over 10 companies filed their draft Red Herring prospectus in the second quarter of 2022, over 40 companies have already received SEBI approval (deliberating on better valuation/market conditions) and more than 50 companies are awaiting SEBI approval.
On a broader business and investment trend, India is among the fastest growing start-up ecosystems in the world. The majority of them are platform (technology) companies which include fintech, consumer internet, Ed-Tech, etc. Although there is a strong base of these emerging platform companies, they are relatively nascent and most are loss-making. From an investment perspective, investors are taking a cautious approach with both private equity and large funds, reducing their capital expenditures. In recent times, it has been observed that many companies are also reducing the size of their IPO. There is a shift in behavior with investors potentially looking for profit-making companies (with good cash flow or a clear path to profitability) versus loss-making companies (many platforms/tech).
As takeoff is only the first step and not the final destination, successful companies look to the longer term horizon by treating the IPO not as a monetizing event, but as a stepping stone to more steps. and greater success. The recent market volatility and unfavorable rise in inflation and interest rates, while posing a short-term challenge, can be overcome with stable business models, proven cash flows and thorough preparation for the upcoming trip.
(Sandip Khetan, Partner and Head of Financial Accounting Advisory Services, EY India and Veenit Surana, Associate Partner, Financial Accounting Advisory Services, EY India. Opinions expressed are those of the authors.)