The fear of missing out or, what we call Fomo, is running high in the equity space. With the charging bulls taking stocks on a seemingly unstoppable rally, the primary market too has hit the fast lane to scale new highs. A robust pipeline of public issues has given momentum to this surge.
A seasoned trader in the secondary markets, Sandeep Runwal (name changed), got the whiff of a primary market rally after the 2021 Budget speech of Finance Minister Nirmala Sitharaman. Listing gains, or the price appreciation in the stock price on the day of listing, was mind-blowing. He started applying for IPOs from the second quarter onwards. But he had a hard luck. The demand for the newly issued shares outstripped supply. He didn’t get any allotment.
Runwal is not the only one. There’s an increasing fear of missing the bus among traders. The reasons that propelled the secondary market bull run are now supporting the primary market in India. The deluge of liquidity generated as a result of the stimulus provided by governments in the West after the pandemic outbreak is now finding its way into the primary market in the form of an institutional subscription. Also, a part of the retail money is routed by domestic mutual fund players, who received these funds through their new fund offerings (NFOs) subscription.
The Indian capital market awaits 40 initial public offerings (IPOs) this year with the companies aiming to mop up Rs 80,000 crore.
From a secondary market perspective, IPOs clearly result in an overall increase in the investable universe. Given that a lot of IPOs are coming from emerging sectors or the ones with very few listed entities, clearly keeps the primary market at elevated levels. The massive surge in IPOs is a reflection of buoyancy in stocks. With liquidity in both global and domestic economies remaining strong, public issues of companies with a reasonably good management competence, track-record, and growth potential are expected to see a good response from investors.
Pankaj Murarka of Renaissance Investment Managers, believes that the liquidity flush will eradicate the need to transfer money from the secondary to the primary market. Also, in the prevailing low interest rate regime, more retail funds are flowing into the stock market in search of inflation adjusted returns.
This isn’t the first time that low-cost sources of money are leading to expensive equity valuations. In the past bull phases too, liquidity tailwinds have always been a big catalyst to boost equity returns. Historically, Indian bull markets have seen 80-plus public issues. This number drops in a bearish trend.
In the decade beginning 2011, the Indian primary market logged in close to 230 companies mobilising resources, both from the public as well as the private sector, garnering Rs 2.53 lakh crore till August 13, 2021 through listing. The hectic activity in the primary market in 2021 is distinct as a whopping Rs 61,000 crore were raised within the first eight months of year alone. It was more than 24 per cent of the total amount of Rs 2.53 lakh crore mobilised in the last decade. According to data collected from Prime Database, during 2011-21, the highest amount from IPOs was mobilised in 2017, when 36 issuances Rs 67,147 crore were raised from the primary market.
Retail investors are said to be the most excited lot subscribing to these IPOs for listing gains.
However, there is a word of caution from experts as they say the exuberance seen in the IPOs is directly linked to the amount of liquidity in the system. “If you are investing yourself, be very mindful about the kind of risk you take. However, it is important to have an element of guidance and advice while making investments,” cautions Yogesh Patil, Head of Equity at LIC Mutual Fund.
Nirali Shah, who heads Equity Research at Samco Securities, had earlier stated that it was safer to judge on the basis of one’s own risk appetite and liquidity requirements before holding on to these companies for a long term.
A host of start-ups have also queued up to float their maiden offers with an exit route to their initial investors who provided the seed capital. The ongoing bull run gives them an opportunity to aggressively price their issues. Many such companies as Zomato, which went public recently, and Paytm, which plans the country’s biggest ever public issue this year, are still in loss and aren’t expected to make any profit in the foreseeable future.
This hysteria is not new to the market and even the western matured markets have experienced it. Last year in 2020, around the same time, NYSE saw the biggest software IPO of tech-start-up Snowflake, mobilising $3.4 billion. The exuberance was on the back of an entry of legendary investor Warren Buffett backing it. Such frenzied listing for a company that is not yet profitable, even though sales are growing rapidly, is a clear sign of hysteria. On hitting the Wall Street, the IPO immediately began soaring 150 per cent plus against the offer price of $120 and is now trading at $285.
Such a situation hints at a bubble in the making, at least in the space of start-up listing.
The palpable frenzy in the IPO market is definitely a cause for concern, according to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Retail investors are applying for IPOs and OFSs without any consideration of fundamentals and future prospects. The aim is to make money from the listing. Many retail investors are likely to lose money in the future from some of these issues. “Now, we don’t know when and how this rally will end. But we know it will end. And when it does, the new retail investors who have flocked to the market recently will be hit hard,” he warns.
There is a basis behind such cautionary warnings by the market experts. The buying force of the retail money is so powerful that foreign portfolio investors (FPIs), who are known for deploying smart money in the market have been compelled to change their trading strategy in August.
FPIs were net sellers in July in anticipation of setbacks in the Indian market. However, they were proven wrong by the equity mutual funds that are flush with the new fund offerings.
A long line-up of IPOs and upbeat market sentiments always go hand-in-hand. The exuberant listing with the upcoming pipeline of issues only shows that euphoria in the markets is at its peak. Hence, markets are expected to remain under pressure in anticipation of immense liquidity being sucked out as long as the IPO party is still on. “In such circumstances, investors should be wary of subscribing to IPOs for the long term and should look at some only from a listing gains perspective,” says Shah.
Another important aspect one should bear in mind is to avoid leveraged position in the primary market. As the demand outstrips supply across the categories, the allotment takes a hit and as a result, the investor has to suffer a loss.
Pranav Haldea, Managing Director, Prime Database, country’s largest primary market data bank, says, “Another distinguished characteristic of the primary market is, however strong be its IPO pipeline, once the activities in the secondary markets take a pause or if there is an indication towards that, the strong pipeline suddenly evaporates. We have seen this so many times in recent past.”
In such an event, issuers, who have made all the preparations to enter the market with their offerings, suddenly develop cold feet and don’t mind holding their issue despite having cleared all the requisite approval from the regulatory authorities like Sebi and RoC. “What is important is valuation in the primary market. As long as you are able to derive strong pricing to your offering; based on the strong secondary market, the show goes on,” Haldea says.
As the fate of primary market exuberance is directly linked with the firm trend in the secondary market, any disturbance in the secondary market may have an adverse impact on the strong IPO pipeline. The potential factors (besides liquidity) that can impact the secondary market dream runs include resurgence of covid cases, rising bond yields, inflation inching up, and rise in interest rates. These factors will raise their head, not immediately but going ahead as it is impossible for any regime to continue with a controlled rate regime. Till the time, the party will continue.
yagnesh@outlookindia.com