What is causing IPO boom in India? Why are experts worried about investor frenzy?

Stock market today: The Indian capital market witnessed a healthy flow of initial public offerings (IPOs) in the first half of the calendar year thanks to favourable market conditions, a strong economic growth environment, easing inflation and stable interest rates.

According to Capitalmarket data, there were some 35 mainboard IPOs in the first half of the year (H1CY24), of which 27 made their debut on bourses at a premium.

Some stocks, such as Vibhor Steel Tubes and BLS E-Services, saw gains of 193 per cent and 175 per cent, respectively, on their listing day. In fact, 21 mainboard IPOs experienced listing gains of at least 10 per cent or more.

The majority of them are still trading with gains.

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Most IPOs saw strong retail buying, showing domestic investors remain bullish on India's solid growth story amid the prospects of policy continuity, pro-growth government measures, benign inflation and the start of the interest rate cut cycle.

"The fundraising via IPO route continues to be stronger following a robust 2023-24 wherein 76 companies went public, raising ₹61,922 crore, and in the current financial year, almost 15 issues have mopped up ₹36,000 crore (including Vodafone FPO), while another 4-5 are set to hit the markets in July-2024," said Prashanth Tapse, senior VP and research analyst at Mehta Equities.

Tapse pointed out that most of the issues are witnessing handsome subscription demand followed by healthy listing gains mainly on the back of reasonable ask valuations and favourable market conditions, giving promoters and investors confidence to raise and invest.

"Going by the trend and as per my readings, the year FY25 can see as many as 100 companies coming to markets to raise capital," said Tapse.

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What is causing the IPO boom?

A confluence of factors has boosted India's primary market. The biggest reason is India's strong macro environment, which has raised investor confidence.

The healthy performance of several new stocks in the last one and two years has also lured investors into investing in new IPOs anticipating similar returns.

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A key factor has been the government's huge investments in infra projects, which seems to have raised the interest of private players in betting on the nation's growth story.

"In the last two to three years, the government has spent huge amounts of money on infrastructure and capex. This is followed by favourable policies like corporate tax cuts, the PLI scheme, Make in India, and housing/water/electricity/internet for all. This led to the start of the private capex cycle, which in turn has led to companies tapping the equity markets to raise growth capital for capex," Mahavir Lunawat, the founder and managing director of Pantomath Financial Services Group, told Mint.

Read more: Expert view: IPO market may see a stronger pull after the Budget 2024, says Mahavir Lunawat of Pantomath

Abundant liquidity in the financial system, regulatory reforms and enhanced financial inclusion also contributed to the boom in the IPO market.

Tapse said that the resilient economy and investor confidence are going hand in hand, followed by ample liquidity in the hands of investors, especially in the hands of retail.

"Post-COVID, India's financial markets have matured. Looking at the country's economic activity and GDP growth, the IPO market takes it to new highs, fueling the nation's growth and creating wealth for investors," said Tapse.

Also Read: Vraj Iron and Steel IPO listing tomorrow: Here’s what GMP, subscription status hint ahead of listing

Don't ignore valuations, business models

The IPO boom in India looks set to continue, driven by strong economic fundamentals and investor confidence. 

However, experts are worried about the irrational exuberance of retail investors for IPOs as they highlight most retail investors chase IPOs for listing gains and do not consider valuations and business fundamentals before investing in them. 

Experts advise caution, emphasising the need for thorough evaluation and due diligence. They say investors should focus on long-term growth potential and avoid getting carried away by short-term gains.

Vineet Arora, the managing director of NAV Capital, observed that the market is witnessing a feverish IPO activity, and one needs to be cautious about the valuations and business models of the companies.

“We see some froth in terms of stretched valuations of some IPOs and are only investing if we are comfortable with the valuations,” Arora said.

"We don't see the trend continuing for the rest of the year, though the number of DRHPs getting filed is increasing with some large IPOs in the pipeline. We would advise investors to be extra cautious and not fear missing as there are plenty of good options in the existing listed stocks," said Arora.

Manish Chowdhury, the head of research at StoxBox, is of the view that with the Indian equity markets sustaining on a stronger footing and trading close to all-time highs, the flurry of IPOs will likely continue in the near term.

"Despite some issues being priced on the higher side, the good listing gains for most IPOs can be attributed to the buoyant market sentiment. Also, the strong listing gains have prompted institutions and retail investors to consider IPOs as a lucrative opportunity for short-term gains," said Chowdhury.

However, he added that investors should consider business fundamentals, industry dynamics, management quality, and valuation before applying for an IPO and not get carried away with the recent strong performance of the IPO market.

Nishant Srivastava, the CEO of Torus Wealth, also expects the positive trend in the IPO market trend to continue, driven by a healthy pipeline of companies seeking to go public.

But he, too, cautioned that in this IPO boom, investors should carefully evaluate each opportunity, focusing on companies with strong fundamentals and growth potential. 

“Diversification and due diligence remain key to navigating the market successfully,” Srivastava said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.