IPO Insights- October 2024

9, October 2024

India is the fastest-growing large economy in the world, with a vision to become a USD 5 Trillion economy in the near future. IMF has termed India the
“Star Performer,” and it’s contributing to more than 16% of global growth this year, according to its current projections. In 2022, India overtook the UK to
become the world’s fifth biggest economy after the US, China, Japan, and Germany. With a robust 7.8% in 2023, India’s resilience amidst global challenges
is evident. Strong domestic fundamentals, financial year policies emphasizing capital expenditure, and structural reforms have bolstered economic
stability

GDP Growth Outlook for Key Economies

The market capitalisation of Indian equity market reached USD 5.54 Trillion in 2024, making our country the fifth largest markets globally, surpassing Hong
Kong, France, Canada and UK. India is closely inching towards China which currently stands around USD 9.8 Trillion.

With the stock markets performing strongly at present, the momentum in public offers is expected to continue in the coming years. Various companies
are planning to file or have already filed their offer documents for their proposed public offers, including for some of the largest IPOs in the Indian capital
markets history. As we stand, the Indian markets are going to witness a capital raise of over INR 60,000 crore over the next quarter with Hyundai Motors,
Swiggy, NTPC Green Energy, leading the wagon.

As of August 2024, the annual IPO activity in India indicates a robust market environment, particularly when comparing it to previous years. The mainboard has taken the lead, with 48 issuers raising INR 51,688 crore in just eight months. This momentum is on track to significantly surpass the previous number of listings and issue size. The strong performance reflects sustained investor confidence and demand for larger offerings.

The SME exchange has also impressive growth in 2024. With 168 issuers raising INR 5,834 crore to date, the SME market is set to exceed last year’s performance, which included 179 issuers and a total issue size of INR 4,822 crore. The significant activity in India’s SME listing sector is driven by increased access to capital, regulatory support, growing investor interest, heightened awareness of listing benefits, and a supportive ecosystem for SME.

Investor Participation

The subscription trends for IPOs from April to August 2024 reveal varying levels of investor interest across categories:

The IPO subscription trends from April to October 2024 reveal varying levels of interest across different investor categories, with QIBs and NIIs showing more selective but intense spikes, particularly in July, September, and October. Retail investors, while more cautious, demonstrated steady growth in engagement, culminating in a peak in October. The strong overall subscription level in September underscores a favorable period for IPOs, likely supported by market optimism and attractive offerings. However, the slight decline in October hints at a more measured approach as the year progresses. These trends highlight the dynamic nature of IPO participation in India, driven by selective enthusiasm among institutional and non-institutional investors and a gradually increasing role of retail investors. For issuers, this analysis underscores the importance of timing and strategic alignment with investor expectations to maximize subscription levels.

IPO Returns

Distribution of listing gains by number of issuers

The analysis of the recent IPO landscape reveals a positive trend, characterized by a significant number of issuers experiencing moderate to high listing gains. With almost 60% of issuers achieving gains of more than 15% and an average listing gain of 33%, the environment continue to be conducive for successful IPOs in line with the previous periods.

Top 5 Issuers by listing gains

The IPO listings in September and October 2024 reveal varying levels of investor enthusiasm, with September generally outperforming October in terms of listing gains. In September, high-profile IPOs like Bajaj Housing and Premier Energies saw substantial listing gains of 136% and 87%, respectively, reflecting robust investor confidence and favorable market conditions. Other companies, such as P N Gadgil Jewellers (65%) and Gala Precision (49%), also achieved solid gains, indicating broad interest across different sectors. By contrast, October’s IPOs showed a more selective response, with only KRN Heat Exchanger matching the high gains seen in September with a 118% increase. Waaree Energies, Diffusion Engineers, and Garuda Construction recorded moderate gains of 56%, 21%, and 12%, respectively, while Hyundai Motor experienced a -7% loss on listing, suggesting a more cautious approach from investors. Overall, September’s listings highlight a particularly favorable period for IPOs, whereas October reflects a more tempered, selective enthusiasm from the market, influenced by company-specific factors and potential shifts in broader market sentiment.

Current Performance vis-à-vis listing gains for issuers listed during April to August 2024

Shares that were listed during April to August 2024, with major listing gains, continued to outperform the boarder markets in majority of the stocks. While some companies have dipped slightly from the listing price, there is positive sentiment for the newly listed stocks beyond listing gains.

Sector contributing to major listing gains

Based on our analysis of the listing gains from various industries, we observed that information technology has given the highest listing gains (2 listing during the year) as compared to other industries. Capital good industry registered a stellar growth both in terms of the number of listing with 9 in total and the listing performance considering the average return of 57% across the 9 listings. Other industries that fared well in listing include consumer durables, consumer services, telecommunication, financial services and textiles. The automobile industry, which raised INR 35,000 crores (appx) registered a meagre 6% listing gains from 4 listings.

Industry trends

The automobile, financial services, and capital goods sectors emerged as the top performers, collectively contributing to over 70% of the total capital raised during the period. A significant portion of the funds was raised through Offer for Sale (OFS) mechanisms. In the automobile sector, Hyundai Motors India Limited and Ola were the major contributors to the capitalraising activity. The financial services sector experienced strong momentum, driven by the highly anticipated listing of Bajaj Financial Services from the Bajaj Group. Other notable listings included Go Digit Insurance and Aadhar Housing Finance, representing the insurance and housing finance segments. The capital goods industry led in the number of listings, with nine companies going public during this period. This sector not only saw the highest activity but also delivered remarkable average listing gains of 57%. Significant capital was raised by Waaree Energies and Premier Energies, with the funds earmarked for expansion and further investments.

CLOSER LOOK: USE OF PROCEEDS

Proposed use of proceeds (Sep-Oct 2024)

Our analysis of the offer documents filed during September and October 2024 indicates that a significant portion of the proposed allocation of the offer proceeds is earmarked for capex expansion, followed by the use for working capital requirement. These two purposes accounted for 66% of the total capital raised, while the remaining amount was used for general corporate purposes, investment in subsidiaries and repayment of loans.

Proposed use of proceeds (Apr-Oct 2024)

While the funds raised over the past two months are primarily earmarked for capital expenditure and working capital requirements, the year-to-date allocation of IPO proceeds tells a broader story. A significant portion has been directed toward general corporate purposes, unidentified acquisitions, working capital needs, and loan repayments. In contrast, approximately 30% of the proceeds have been utilized for capital expenditures and investments in subsidiaries.

KNOWLEDGE CORNER

SEBI’s New Guidelines on Voluntary Proforma Financial Disclosures: Enhancing Transparency in Public and Qualified Institutional Placements

The Securities and Exchange Board of India (SEBI) has recently approved a set of recommendations to improve the transparency and reliability of financial disclosures in public offerings, rights issues, and Qualified Institutions Placements (QIPs). SEBI’s new guidelines allow issuers greater flexibility in disclosing proforma financial statements and financial information related to recent acquisitions or divestitures. These changes are designed to give investors a clearer picture of a company’s financial health, particularly in cases where acquisitions or divestments may impact financial results. Here’s a detailed look at SEBI’s new approach to voluntary proforma financial disclosures and how it benefits investors.

Requirements before amendment

Under the SEBI (ICDR) Regulations, issuers undertaking a public or rights issue must include proforma financial statements for any “material” acquisition or disposal that occurs after the latest reported financial period but before the offer document’s filing date. These proforma statements must cover the latest completed financial year and stub period as applicable. They are prepared according to the guidance note issued by Institute of Chartered Accountants of India (ICAI) and certified by either the statutory auditor or an independent chartered accountant.

However, there are no enabling regulations for the voluntarily inclusion of the proforma financial statements for acquisition or divestment already undertaken or proposed to be undertaken from issue proceeds in case of public issue, rights issue and QIPs.

Recognizing these limitations, the Expert Committee for facilitating ease of doing business and harmonization of the provisions of ICDR and LODR Regulations recommended a set of voluntary disclosure options to SEBI, designed to give issuers the flexibility to present a more comprehensive view of their financials. Key recommendations include –

in public issues and rights issues (both fast track and otherwise), in addition to the existing requirements, the issuer should be permitted to voluntarily include proforma financial statements for such additional fiscal periods as it deems necessary, including, even if the acquisition or divestment was undertaken before the completion of the latest period(s) for which financial statements are disclosed, especially if the full year impact of the acquisition or divestment is not reflected in the latest period(s) financial statements;

the issuer should be permitted to voluntarily disclose financial statements of the subsidiaries/ businesses acquired or divested, provided such financial statements are certified by the auditor (of the business or subsidiary acquired or divested) or an independent chartered accountant, either of whom should be peer reviewed;

in QIPs, the issuer should be permitted to voluntarily include proforma financial statements, provided these are certified by the statutory auditor or an independent chartered accountant, either of whom should be peer reviewed; and

Further, it was also recommended that if the proceeds of the issue are proposed to be used for the acquisition of one more businesses or entities in a public issue, rights issue or a QIP, an issuer should also be permitted to voluntarily disclose proforma financials (on a consolidated basis) to disclose the impact of such acquisition. The proforma financial statements should be certified by the statutory auditor or an independent chartered accountant, either of whom should be peer reviewed.

Illustrating the Importance of Proforma Financials for Investors

To understand how these changes benefit investors, consider two illustrative scenarios involving companies with recent acquisitions:

Scenario 1

A company acquires another entity after the close of FY 2023 (post-March 31, 2023) and prepares a draft red herring prospectus (DRHP) including restated consolidated financials for FY 2023, FY 2022, and FY 2021. Without proforma financials for prior periods, investors may see an abrupt jump in financial metrics such as revenue when comparing FY 2022 to FY 2023, lacking context for growth continuity. With comparative proforma financials for both FY 2023 and FY 2022, investors can evaluate a normalized growth trend, gaining insights into the acquisition’s full impact on revenue and profitability.

Scenario 2 – A company completes a significant acquisition in February 2023 and prepares a DRHP with consolidated financial statements for FY 2023, FY 2022, and FY 2021. Only two months of the acquired company’s financials are included for FY 2023 (February and March), which could lead investors to underestimate the acquisition’s full impact on the company’s financials. Voluntary proforma financials for the full fiscal year would allow investors to see the acquisition’s effect on an annualized basis, offering greater clarity on the acquisition’s implications for revenue, expenses, and overall financial health.

Voluntary Inclusion of Proforma FS even if Acquisition Consummated Prior to Completion of Last FY

Significant Acquisition done prior to completion of FY and thus no Proforma FS disclosed in DRHP

If Proforma FS would have been disclosed for FY in which Acquisition was done (INR Crores)

By permitting issuers to voluntarily include proforma financial statements for acquisitions and divestments, SEBI aligns India’s regulatory framework with global best practices. These changes are designed to promote transparency and give investors a comprehensive view of a company’s financial position, especially in cases where strategic transactions significantly affect its financial results. The requirement for peer-reviewed certification further reinforces the credibility of these statements, ensuring that investors can rely on accurate and robust financial data.

Conclusion

SEBI’s new guidelines for voluntary proforma financial disclosures represent a significant advancement in regulatory flexibility and market transparency. By allowing issuers to provide additional financial context around acquisitions and divestments, SEBI enables investors to make more informed decisions based on a comprehensive understanding of a company’s financial trajectory. As SEBI continues to align its regulations with international standards, these updates further solidify India’s capital markets as a competitive and transparent investment destination.

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