IPO demand may pick up in the second half of FY24 after macro headwinds settle

• Volatile market conditions that have raised concerns over frothy valuations, along with strict regulatory requirements, have led to companies withdrawing or deferring their IPO plans.
• As a result only four companies have launched their IPOs so far in 2023
• At least seven companies, including Fabindia, BoAT, PharmEasy and Snapdeal, have shelved their IPO plans after having filed a DRHP with the markets regulator.
• IPO demand may revive from the Q2 of FY24 as market headwinds like uncertainty in interest rates and inflation are expected to cool down.

With several uncertainties in the global markets roiling the Indian stock markets, companies have either delayed or dropped their plans for raising money through initial public offers (IPOs). However, IPOs are likely to pick up steam in the second half of fiscal year 2024 when macro headwinds are likely to calm down.

At least seven companies, including Fabindia, BoAT, PharmEasy and Snapdeal, have shelved their IPO plans after having filed a draft red herring prospectus (DRHP) with the markets regulator Securities and Exchange Board of India (SEBI).

Companies that have deferred their IPO plans after having filed a DRHP with SEBI

Volatile market conditions that have raised concerns over frothy valuations, along with strict regulatory requirements, have led to companies withdrawing or deferring their IPO plans.

As a result only four companies have launched their IPOs so far in 2023. This is a big change from an IPO boom that was witnessed in 2021 when most of the companies that debuted gave positive or rather very significant premiums on listing day.

In 2022, 38 mainboard IPOs went public as compared to 64 in 2021.

Meanwhile, apart from postponing IPOs and waiting for better market conditions, companies are currently also cutting down their IPO size because of capital needs.

"Currently, the investor demand in the primary market is muted, which has also kept companies from coming out with their IPOs. Meanwhile, companies that are still coming out with an IPO by cutting its issue size could be because of need for capital or exit of shareholders who cannot wait. Also, companies are delaying their IPOs because of lower valuation as compared to expectations,” said Ajay Saraf, head of investment banking and institutional equities at ICICI Securities.

As per reports earlier this week, SoftBank-backed Indian hotel aggregator Oyo Hotels and Homes plans to cut its IPO share offering by about two-thirds as tech valuations plunge. The company had initially filed to go public in October 2021 but has delayed it so far due to erratic market conditions.

Not just IPOs, private equity funding as well as mergers and acquisitions have also slowed down this year due to uncertain macroeconomic conditions.

IPO demand to pick up in Q2 FY24

High interest rates and inflation across the globe coupled with geopolitical issues are some crucial factors impacting markets and keeping companies from launching IPOs.

Between May 2022 and February 2023, the Reserve Bank of India (RBI) raised the repo rate by 250 bps to tackle inflation. Meanwhile, India’s retail inflation, which edged down slightly to 6.44% in February from 6.52% in January, still remains above RBI’s tolerance limit of 6%.

Analysts expect the rise in interest rate cycle to pause during the end of the year as inflation may cool off, which is when markets would recover and investors’ demand for IPOs may pick up.

“Demand is expected to remain subdued in the short term till the time macro headwinds are not settled. However, the demand may revive from the Q2 of the next financial year as market headwinds like uncertainty in interest rates and inflation are expected to settle by then,” said Saraf.

While market sentiment is expected to remain cautious for some more time, analysts see large IPOs taking a back seat for a couple of quarters.

“With weakness still prevailing in the secondary market, because of a combination of domestic and foreign factors, IPO activity is likely to remain muted for the first couple of quarters. We may see some smaller-sized IPOs. However, it will be a while before we see larger-sized deals, especially in light of lack of sustained interest from FPIs (foreign portfolio investors),” Pranav Haldea, managing director at Prime Database Group, said in an IPO outlook report for FY24.

Even after the collapse in the banking sector, triggered by the failure of Silicon Valley Bank and Signature Bank, the US Fed went on with its interest rates hike in April calling the banking system "sound and resilient" as it remains focused on bringing down inflation in the country.

And till the time inflation and interest rates do not cool down, investors’ demand for IPOs will remain subdued.

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