By Sandip Khetan and Veenit Surana
The journey to IPO for a company is similar to that of an airplane planning to take off. All passengers must be aligned and on board (key stakeholders), the runway must be optimised (in terms of preparation), the weather must be checked (geopolitical and broader market conditions), and the financial and operational prowess must all be considered to have a safe take off and a steady flight. Importantly, it cohesively brings all factors together.
Similar to the global IPO market, Indian capital markets have witnessed a slowdown in IPO activity due to geopolitical factors, inflationary pressures and a rise in interest rates. Globally, India is positioned 4th in terms of the number of IPOs (~49) and 5th in terms of proceeds raised in YTD 2022. Recently we witnessed the IPO of Life Insurance Corporation of India (the largest in Indian capital market history) which has been met with lackluster post-IPO performance due to various factors. This has not diminished other companies from exploring the IPO runway.
Timing, being ready to take off during the momentum, is key. Many companies are continuing to make preparations for an IPO later this year or early next year, based on favourable year-ended March 2022 results.
Going by the historic experience of 50+ recent IPOs, companies can take at least 8 to 12 months to IPO, with SEBI approval consuming 3 to 4 months on average. In 2021 we witnessed that out of 64 companies going public, 50+ companies received approval during 2021 itself with an average duration of 3 months to receive the SEBI approval from their DRHP filing. About 1 out of 4 companies (25%) re-filed their DRHPs in 2021 due to the favourable market conditions and managed to receive approval and a list in the same year. This was supported by momentum in the markets and high liquidity. The BSE Sensex moved up by around 10,000 points in a single year.
IPO preparation involves building a compelling equity story, the timely appointment of various stakeholders, enhancing corporate governance and appropriate legal and capital structure presence. It is also imperative for companies to go through the audit process, restated financial information (including quarterly results), participate in the comfort letter process, get through the legal/banks due diligence and finally conduct the investor roadshows along with book building and price discovery. All of these processes can easily take 6 to 9 months.
There is a strong pipeline for IPOs in the second half of 2022. 10+ companies have filed their Draft Red Herring Prospectus in Q2 of 2022, 40+ companies have already received SEBI approval (deliberating better valuation/market conditions) and 50+ companies are waiting for SEBI approval.
On a broader business and investment trend, India is amongst the world’s fastest-growing start-up ecosystems. The majority of these are platform (Tech-enabled) companies which include fintech, consumer internet, Ed-Tech, etc. While there is a strong base of these emerging platform companies, they are relatively nascent and most are loss-making. From an investment perspective, investors are adopting a cautious approach, both with private equity and large funds, reducing their investment spending. In recent times it has been observed that many companies are also trimming down their IPO size. There is a behavioural shift with investors potentially seeking companies that are profit-making (with good cash flows or a clear path to profitability) vs. loss-making (many platform/Tech-enabled) companies.
As take-off is just the first step and not the end destination, successful companies look at the longer-term horizon in treating IPO not as a monetizing event but to springboard to more milestones and greater success. Recent market volatility and unfavourable increase in inflation & interest rates, while posing a short-term challenge, can be conquered with stable business models, proven cash flows and thorough preparation for the journey ahead.
(Sandip Khetan, Partner and Financial Accounting Advisory Services Leader, EY India and Veenit Surana, Associate Partner, Financial Accounting Advisory Services, EY India. Views expressed are the authors’ own.)