At the end of an hour-long meeting with his private equity investors in August 2016, Sanjay Agarwal, 46-year-old promoter of Au Small Finance Bank, scribbled 'IPO' on a piece of paper and circled it.
Writing notes to self on chits has long been a habit with Agarwal, India's youngest banker. Twenty-three years ago, Agarwal had scrawled out his plans to start an NBFC and since then, every definitive doodle has helped cross a milestone. Barely 11 months after he wrote 'IPO,' Agarwal marched Au to Dalal Street and raised Rs 1,912 crore. "We wanted to give exit to some of our PE investors who stood by us when we needed capital. The bank has not received any money from this IPO," says Agarwal.
Au Small Finance Bank is just one of the 122 corporates responsible for making 2017 the blockbuster year of Indian primary markets, with issuances across categories. From new age banks to a shoe brand; from a staffing enterprise to a publisher and even a mass market grocery retailer — everyone capitalised on the optimistic market mood and strong fund flows. And when our giant homegrown insurers, capital goods and infrastructure companies also joined the party, it meant the year notching up the highest ever fundraising through IPOs. $10.85 billion is no joke.
Other statistics are equally staggering. The year saw the largest IPO in a decade, from General Insurance Corporation; nine IPOs trading 50 – 350% higher than their offer price while 85 of the 122 IPOs & follow on public offers or FPOs (i.e. 70%) are trading at a premium to their offer price. But a subtle change reflects a fundamental shift. Call it the rise of the minority shareholders. A key catalyst for opening the IPO floodgates was the need to give shareholders an exit, a far cry from traditional drivers such as raising money for capex or retiring debt. Like Au, 10 others tapped the equities market this year — not for capital, but to give an exit route to existing shareholders. Such offer-for-sale (OFS) deals accounted for over 48% of the IPO capital raised in 2017.
Players as diverse as Eris Life Sciences, Indian Energy Exchange, Bombay Stock Exchange, Hudco, ICICI Lombard, SBI Life and HDFC Standard Life, among others, sold shares worth Rs 31,890 crore — but not a penny reached company coffers. The biggest beneficiaries were promoters and PEs. "It's been the biggest and best year for PE exits," says Sanjay Kukreja, partner at ChrysCapital, which redeemed investments in Au and Eris with over six-fold returns.
Sponsors of six insurance companies tapped the capital markets to scale down holdings and align with regulations.
Proceeds would go to strengthen balance sheet of most sponsors. Even the government got on the gravy train, raking in Rs 12,800 crore with divestments via the markets, accounting for some 80% of all OFS.
The market has been more than generous and willing to explore new structures and ideas, highlights Sumit Jalan, co-head of India investment banking and capital markets at Credit Suisse. "We saw a reasonably eclectic mix of new products, sectors and themes. Investor appetite was generally positive across the board for this mix of new listings, from insurance companies to infrastructure investment trusts." Smaller companies, a mixed bag in performance, capitalised on the momentum.
"We now have enough expansion and acquisition capital," says Samir Khurana, head of strategy & investment at S Chand, whose IPO also gave PE backers a payday.
E QUITY CULT: MKT GANDO THAYO CHE
At 33,200 Sensex levels, the Indian equities market has returned in excess 24% since January. Much of the rally has been on account of strong domestic flows. Foreign portfolio investors (FPIs), in contrast, have been selective in terms of secondary market investments, argue analysts. "Financialisation of domestic savings has been a key driver to the IPO cycle," believe Gautam Duggad and Deven Mistry of Motilal Oswal. "We expect a higher share of domestic savings to flow into equities over the next few years. Strong domestic flows, coupled with benign FII liquidity — both in primary and secondary markets — have driven strong fund raising," they wrote in a report earlier this week. Many like Abhay Laijawala, head of research at Deutsche Equities India, feel foreign investors find India expensive; so, cherry-picking a prime IPO paper is a far better alternative.
"FPIs have net bought only $1.5 billion in secondary markets, choosing to invest more in IPOs," he says. Marquee FII interest was evident especially in financial and consumer stories. The Rs 8,695-crore HDFC Standard Life public issue managed to raise Rs 2,322 crore from anchor investors Kuwait Investment Authority, First State Asia, the Carnegie Fund, Government of Singapore and Master Trust Bank of Japan. Some like AllianceBernstein and US National Railroad Investment Trust made their India debut too while the HDFC issue also saw, for the first time, four large sovereign wealth funds —namely, Temasek, Government of Singapore, Abu Dhabi Investment Authority and Kuwait Investment Authority — bid together.
WHAT'S IN IT FOR JOHN DOE?
While institutional investors muscled their way to larger allocations, small retail investors did not get enough shares in most top-rated issues. Many did not agree with the pricing. "Even PSU IPOs were expensive," laments Arun Goenka, a prominent Mumbai-based investor. "And in quality issues such as Avenue Supermarts, very few people got shares. Only two of seven retail subscribers got allocation in Avenue." But it wasn't a free for all. Eleven of 33 newly-listed firms are still trading below offer price. CL Educate, S Chand, New India Assurance, Matrimony.com and Khadim languish at the bottom of the charts (prices as of first week of December).
"Pricing was not right in most issues… If there's overall market correction anytime soon, these new-listed companies will decline far more than others," predicts Vinod Dadlani, another Mumbai-based investor. HNIs kept away in the year's second half.
This aggressive tribe almost gave a complete miss to insurance IPOs such as ICICI Lombard, SBI Life, GIC and New India Assurance. "HNIs are margin-backed investors. They borrow to invest in IPOs… If they do not see much listing gain, they simply skip the issue," explains Dadlani.
In overall terms, markets responded positively to most IPOs this year. When retail investors gave some a miss, institutional investors shovelled in more money to salvage these issuances. "New emerging sectors such as healthcare, consumer-facing businesses, logistics and insurance are in great demand," says Vikas Khemani, president & CEO of Edelweiss Securities. "IPOs help to reduce a bubble-like situation in secondary market."
THE NEW CROREPATIS
Eighteen first-time promoters have joined the list of 'crorepatis' this year, with their aggregate holding value breaching Rs 93,000 crore. The reclusive and obsessively media shy Radhakishan Damani, Avenue Supermarts promoter, eclipsed many A-listers from the billionaire rich lists. Au's Agarwal and SIS' Ravindra Kishore Sinha family of Bihar trail at a distant second and third position, with holding values around Rs 6,300 crore. Beyond notional stock market gains, a favourable IPO market helped several promoters raise much-needed expansion and working capital funds. Potato chips-maker Prataap Snacks, for instance, successfully raised Rs 480 crore via an OFS-cumfresh issue. "Proceeds of the IPO will help us to expand our business. We've already installed a 2-tonne 'chip line,' which can process 2,000 kg of chips every hour," says its MD Amit Kumat.
But listing also brings to fore heightened scrutiny and an array of disclosures, standard governance practices and reporting. Smaller companies are slowly getting used to the idea of quarterly reporting. "We're a company owned by public shareholders now. We've to analyse our accounts more frequently and report with greater clarity. We've to be more careful and responsible now," says Khurana of S Chand.
Few enterprises that went public this year also had reserved 'share quotas' for employees. Some like Eris, Matrimony, MAS Financial Services and Mahindra Logistics even gave discounted offer prices. MAS' finance director Mukesh Gandhi says, "We offered a discount to our employees to make them feel wanted. Besides, we've created a tidy list of longterm shareholders." The Ahmedabadbased NBFC allocated 1.6% of its total share issue (worth Rs 460 crore) to employees — at 9.8% discount to its IPO price.
Despite that, not many companies managed to get employees on shareholder registers. "Employees may not be very equity-savvy; that could be a simple explanation," says Pranav Haldea, MD of Prime Database, a corporate tracker. "Another way to look at it would be, employees are not very hopeful of companies they work for. In such a case, low employee subscription in IPOs could be a worrying trend."
PAYDAY FOR PEs
Christmas came early for ChrysCapital. At their annual investors' meet in November at Hong Kong, Kukreja played Santa to his global investors, read LPs — family offices, endowment, sovereign and even large pension funds — as the team shared news of mega-IPO exits from portfolio companies such as Au and Eris. "The perception about India being a difficult market for PE exits is fast changing," say Vishal Mahadevia, India co-head at Warburg Pincus. The slew of IPOs in 2017 helped several funds redeem investments as they sold shares worth $1.17 billion, Venture Intelligence data reveals. There were 20 PE-backed IPOs — "a record of sorts." It also has a multiplier effect.
More exits mean more confidence on the local team's ability to deploy smart money and make smarter returns in an otherwise tumultuous market like India. But when a Warburg Pincus, KKR or a homegrown Multiples rakes in the dollars, it becomes that much easier to sell the India story. Fund allocation for the region and the market too goes up exponentially as an obvious corollary.
"Our investors are excited about India and the opportunity. There's economic growth and some of the best entrepreneurs here," says Mahadevia. "Over the years, we've seen even domestic fund pools getting deeper in India. Now, there are a whole range of exit options — starting from strategic exits to secondaries and IPOs," adds Kukreja, pointing at the fat cheques and bolder transactions.
BOTTOMLINE: PARTY CONTINUES
"2018 should be a better year from a variety perspective," quips Subhrajit Roy, head of ECM origination at Kotak Investment Banking. But Roy still bets on the unrelenting juggernaut of financial companies at equity markets. "Listed financial companies have performed well over the past 1-2 years; this, in turn, is generating appetite for new listings in the sector," he explains.
Most of Roy's peers expect the IPO boom to continue for the next six months at least, buoyed by corporate earnings growth kicking in from the second half of 2018.
Once that happens, "there will be good buying opportunities in secondary markets as well. Investors may give a slip to pricey IPOs," says Laijawala of Deutsche. PVK Mohan, equities head at Principal MF, gave a slip to several IPOs as many were heavily oversubscribed. But the fund manager did buy into many of these companies once they got listed. "We did get a few opportunities at lower price levels early on… But it has become harder now with higher levels of oversubscription," he says.
"The IPO market has been heating up over the last 3-4 months. Not all issuers are of good quality now. Investors should exercise caution while investing in public issues," warns Mohan. The sizzling Sensex is still no glitzy casino on the Vegas strip.
FLAVOUR OF THE SEASON
Insurance companies dominated the primary markets. Six mobilised close to Rs 45,000 crore in 2017. Insurance raised 3/5th of total funds raised via IPOs. Even the government raked in. General Insurance Corporation's Rs 11,370 crore IPO was the largest in India in the last decade. Most were OFS as sponsors were under regulatory compulsion to scale down holdings. "A public listing gave us a lot of exposure… Insurers will now be more focused on governance, disclosures and performance," says Bhargav Dasgupta , MD & CEO of ICICI Lombard General Insurance, which issued shares worth Rs 5,700 crore in September.
IPO OF THE YEAR
Radhakishan Damani's Avenue Supermarts saw frenzied interest from all classes of investors. The Rs 1,870-crore IPO was subscribed over 100 times, with most applications coming from HNIs and institutional buyers. "We were overwhelmed," quipped Neville Noronha, CEO, Avenue, D-Mart's parent. "From an employee point of view, almost 90% of our pre-IPO employees got ESOPs. This was our way of rewarding them." Capital markets helped the company retire debt and make its balance sheet stronger to take on bigger rivals and online Goliaths. Avenue shares were offered at Rs 299 apiece. It was listed at Rs 604.40 and is currently trading at Rs1,134. Even for other incoming investors, there was enough "on the table."
… & THE DUD OF THE YEAR
The Rs 239-crore public issue of CL Educate, which owns test-prep brand Career Launcher, failed to live up to expectations. It debuted at Rs 398 per share, over 20% lower than its issue price of Rs 502. CL Educate is trading at Rs 293 currently. The issue was subscribed two times, with most bids coming from small retail investors and domestic institutions. Others like S Chand & Co and New India Assurance flopped since listing, topping the list of losers since issue price.
SMALL IS BIG
SMEs tapped the IPO markets by the dozen, with over 100 companies getting listed and raising working capital on the mini-bourses. Average IPO size has also gone up from Rs 8-8.5 crore to Rs 13-14 crore currently. "This was a record year for SME issues," says Mahavir Lunawat, MD, Pantomath Capital, a leading SME I-banker. "We're seeing a lot of institutional participation as well.
A lot of family offices, portfolio management schemes and even mutual funds are investing SME issue now." Market capitalisation of SME bourses crossed Rs 30,000 crore in 2017, also a record.
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