Issuers confident, IPO launches likely even during election phase, say i- bankers

V Jayasankar, MD & Member of the Board, Kotak Investment Banking and Jibi Jacob, MD and Head ( Equity Capital Markets), India, Jefferies (Illustration: Moneycontrol)

After a muted first half, 2023 suddenly morphed into an action-packed year for equity capital market deals. I-bankers say the successful market debut of Mankind Pharma was the turning point. The rest of the year witnessed a wave of IPO's across sectors and block deal mania by private equity funds and venture capital firms looking to clock returns and exit portfolio firms.

And the frenetic deal momentum will continue in 2024, with IPO launches likely even during the phase of general elections. Such is the level of confidence amongst issuers and investors who would usually be in wait and watch mode.

That's the word coming in from V Jayasankar, MD & Member of the Board, Kotak Investment Banking and Jibi Jacob, MD and Head (Equity Capital Markets), India, Jefferies.

Both the top investment bankers caught up with Moneycontrol's Ashwin Mohan for an incisive chat on the key capital market deal trends for 2024 even as the duo bet on segments like financials, technology, healthcare and new age firms to drive transactions.

(Edited Excerpts)

We saw 57 main board IPOs which were announced this year, which collectively raised more than Rs 49,000 crore. In comparison, 2022 saw a total of 40 main board IPO's raising Rs 59,302 crore. Thats as per data from Prime Database. Pre-Mankind Pharma's Rs 4,300 crore market debut in May, 2023 was lacklustre for IPOs. Post Mankind, the deal environment changed dramatically. What factors led to the sudden pivot?

V. Jayasankar:

That's a very interesting comment. Last year around the same time, there were two or three macro factors that were playing out in a strong manner. Everyone was talking about China and resurrection of the capital markets. Their forecast was China will give a 15% return. The second issue was US inflation and the interest rate hikes. And the US Fed had not indicated any stop that we are seeing today. So these two factors had their impact on India. The FPI investors pulled out about $5 billion in the first two months of January and February and all the money was going to China. And then investors realized sometime around March, that China is not unlocking the way everyone was predicting, and India started taking center stage. Our domestic flows were very strong. As you know, the SIPs were contributing close to $2 billion every month. And there was enough domestic money that was waiting to be invested.

The FPIs started looking at India in a much bigger way from March onwards since China was not unlocking the way they anticipated. Both of us were involved in the Mankind IPO and we saw a great opportunity. It was a fantastic book which had very strong demand from FPI investors as well as the DIIs. And that in a way set the tone I would say for the full year. That IPO is a stupendous success. Today, the stock is probably up 80%-85% from its IPO.

The second thing I would say is on back of that, a lot of other IPOs started coming to the market. But the difference between the current year versus the previous year or even 2021 is this has been more a market of small caps and some mid-caps. So though you talked about 57 IPOs, the average size of the IPO is about 100 million and the average size in CY 21 was 250 million. So it's probably 40% of the size of the IPOs of CY’ 21.

And if you look at the indices, large caps have given us 17% return, mid-caps 41% return, small caps 48% return. So naturally with the returns being more skewed towards small cap and mid cap, you had a lot more IPOs on that front, and indices have also made good money.

Jayasankar spoke about the China factor and that most of the IPOs this year were skewed towards the smaller and the mid-cap space. Your thoughts on the turning point for the IPO market, Jibi?

Jibi Jacob:

Yes, I think for any primary market activity, I think there are predominantly three things that have to fall in place. Maybe not necessarily in that order. One is a good secondary market, the VIX, that is the volatility index should be on the softer side, and more importantly, how the FIIs and DIIs money is flowing into the country. DII's of course is local, and as Jaya mentioned earlier , more than $2 billion of SIP was coming in.

For the first 4 months of this calendar year, FIIs more or less were undecided about the India strategy, but May onwards you saw them, putting in anywhere around $4 billion month-on-month. And that is where the Mankind IPO happened. And it was a great outcome. It's a great success. And on the back of that issue, you saw some more companies planning their IPO. I think what we are also seeing is very high quality companies coming into the market right now versus 2021. And, in 2023, though sizes have gone down, I think the quality of the firms and the pricing of IPOs has been a great contributor to the outcome that we're seeing today.

Jayasankar, Jibi referred to pricing. Any trends that you noticed this year in terms of IPO pricing and participation in anchor books? Were companies a tad more cautious and anything that stood out for you?

V. Jayasankar:

So if you look at the IPO returns, the listing day returns for most IPOs of the current year is roughly about 35%. And that's fantastic from the investor standpoint. You don't see a 35% return, typically, in any year. And if you look at the listing to date for all the IPOs that happened in the current year, it's about 55%. I would say to some extent, because a lot of the IPOs were small caps, and there were probably about 6 or 7 issues greater than 1,500 crore, it's been a little bit more of a buyers’ market. And therefore, the IPOs got very attractively priced and investors have made a lot of money. And therefore, as you look at the outlook, investors have a very positive sense of what would happen to the IPOs next year. So in that sense, I think it's been a great year for everyone concerned.

Now that we have got some of the key trends captured, let's move on from IPOs to the world of bulk deals and block deals. There was a clear block deal mania in 2023 across sectors. According to data from Prime Database, as of 22nd December, the total amount of bulk and block deals stood at Rs 386,940 crore versus Rs 326, 863 crore in the earlier year. One trend that clearly stood out was some of these block deals were unusually large and some of them were proper clean outs, which you wouldn’t have visualized in earlier market situations. The Baring-Coforge block deal and the recent Blackstone Embassy REIT block deal come to mind. What gave folks the confidence to opt for this route in such an aggressive manner?

Jibi Jacob:

Yes, so the moment the depth of the market increases, the confidence of private equity investors goes up, especially because in the last couple of years, a lot of control deals have happened in India. Earlier, the only route for them to exit was M&A. And capital market as an exit was not really there. When the KKR-Max deal happened, it was the largest percentage stake sold in a block deal with around 27% or 28% exchanging hands.

We have got a lot of inbound ( queries) in terms of how private equity investors should look at getting their portfolio companies into the market and go for eventual exits. The LPs are given far more confidence when it comes to exiting through an IPO and future sell-downs in the market. And as you rightly said, be it a Coforge or a Blackstone Embassy REIT, it gives far more confidence to also private equity investors that this ( block deals) is a suitable and viable option. And it also goes hand in hand with the money flow into India, and so overall,it is a very conducive environment.

We do believe that this trend will continue into the next year and many years to come. Why? Well we just did an analysis, and around 80% of the companies that IPO in India, above a size of $100 million, are backed by private equity investors. So the funnel that gets carried on to 2024 and 2025 for futures sell-downs, it's quite a very strong pipeline.

There used to be a phase where post IPO, QIPs used to be the far more important product out there. Today for capital market bankers, I think after IPO, block trades have become very important. I think block trades are overtaking QIP which are not happening as much as they would have happened in the last five years back. So that's an important trend that we're seeing and everybody will try to capitalize on it as the window of opportunity emerges and December was a classical month. I think the entire activity that we saw in December is far more than what we saw in the last 11 months.

Perhaps, some of these bigger block deals would have been potential M&A situations that would have been converted into an equity capital market mandate. What is the reason why private equity firms are ready to sell such substantial amount of stakes at one go, Jayasankar? Does time play a big factor in them opting for the block deal route as compared to giving a mandate to an M&A banker and going through the entire due diligence process?

V. Jayasankar:

Both Kotak and Jefferies were involved in the Max Healthcare-KKR deal and in that transaction, about 48%-50% of the blocks were sold in just three tranches in one year. Prior to that, no one would have believed that you can sell 50% of the company, $2 billion dollars in just one year in three tranches. And in a way, that gave confidence to a lot of PE investors to make a similar exit. Look at the Embassy transaction where we were involved last week, we sold $850 million, nearly 24% stake, and Blackstone has exited about 48% in a matter of, say 3 years. So now PE investors know that if they have a 50% or 60% stake, it is possible for them to make an exit.

So does the pace of exit make this an attractive route?

V. Jayasankar:

It’s the pace of exit. So if you were to take a company public, and if the PE investor were to exit, call it 50%, 60% in a matter of two years from the time of listing, it is possible today. And the other thing, Ashwin, I would say is there's a pretty strong domestic and foreign flow. If you look at the current year, the FIIs have probably pumped in somewhere about 20 billion and the DIIs have pumped in about 22 billion. $42 billion is a lot of money and you had only a market of small cap and mid cap IPOs. So it was very natural for this money to really find its way into some of these large block deals. Thats the reason if you look at the block deals, they're probably 3x or 4x of the IPO size. And it's very natural. Our belief is that this will continue and will sustain.

From an FPI, standpoint, I don't think there is a limit to what money can come in. So if a Max block doesn't happen, or an Embassy block doesn't happen, then some of the global funds that are looking to invest anywhere in the world, including India will not come here. So the fact that you're making these deals happen is making some of these global funds to focus. These are not India dedicated funds that necessarily have to invest. If you have a great opportunity, extra few billion dollars can come in. So that's what is making a difference.

As I was parsing through the data compiled by Prime Database, I realized that one-fourth of the total block and bulk deals this year came from the financial services segment. Jibi, you mentioned that you expect a lot more block deals in 2024. Which are the sectors in your opinion which will see action?

Jibi Jacob:

I think our belief is financials, technology and healthcare are three sectors (on a value side) which will dominate. But if I were to look at from a volume side , manufacturing as a general theme will also see favor. But you don't have companies of that large a size to have manufacturing on the value side. You asked a very interesting question - why public market exit for private equity funds? So the other option is more private, where a strategic comes and takes control. And that's not very easy to execute because once you cross the threshold of the takeover code, somebody has to make an open offer, which reaches to 51%. That's quite a large amount of money. And if it's a global strategic, they know that taking companies private in India is virtually impossible, because the high threshold that we have, 90% of the shareholders voting in favor. So with the right amount of capital flows into India, I think public market exits are far more easier to execute and it's an outcome which also kind of gives you the right value.

Right, we have established why blocks are the flavor of the season. Now, let's move forward to a few other big picture factors. What signal does the recent victory of the BJP in the state elections send to investors, market participants and corporates? These elections were seen as a semi-final of sorts and people are hoping that if the same government continues, there would be policy stability which is key to investors. What's the level of optimism on the ground Jayasankar?

V. Jayasankar:

After you saw after the state election results, FPIs have invested close to $7 billion in December which is close to 30% of their overall flows in the country for the current year. That tells you the kind of optimism you generally see when there is the expectation of political stability. Investors are factoring that there will be political stability after the national elections, forget about who wins, or who loses, but what they're factoring certainly is that there is going to be policy continuity, political stability.

You might be surprised to see the deal volumes keeping pace, probably well into the election season. From a corporate standpoint, the way they're looking at everything is, 2022 was a very tough year because of the tech meltdown, global equity markets meltdown, 2023 continues to be tough globally, India was a bright spot. If you look at the outlook for 2024, global equity markets are not likely to perform anything close to 2021. Investors are expecting the global equity markets from an IPO standpoint to come back sometime in 2025.

India will continue to be the bright spot, you will see far greater number of larger IPOs, mid-cap IPOs then what you saw in 2022 and 2023. Corporates are making that preparation, even the PE investors are factoring in that, given the amount of stake that they want in companies, that it would be a good block deal environment for them to exit. So all in all, its a good outlook.

So that's the overall sentiment that you're picking up Jayasankar. Jibi, what feedback are you picking up from the market and your clients ?

Jibi Jacob:

So if you look at 2014 elections or 2019 - we did this quick analysis, the DRHP filings and IPOs getting priced, fell close to around 55%. It's just not deals getting done but also companies wanting to file their DRHP, fell by 55%, 6 months prior to the elections. So September onwards, you saw a complete lull in 2014 and 2019.. And we all love to use this phrase that "this time is different", but actually it came out true and when you just really double click between 2021 and 2022, while the volume of IPOs fell by 50%, it was virtually 2 months in that entire 12 month period, where 55% of the IPOs got done. So what it signifies is that you have to be in the state of readiness, you can't really call out what is the time where there will be a great window, where you can get the IPO pricing done.

The state election outcome as you rightly said and all the flows are a validation of that fact that stability for the next four or five years is greatly valued by investors. And we expect that momentum to continue. In fact, a lot of the issuers are planning to maybe launch their IPOs in the March to May- June window where you will be in the middle of elections or the election results are coming out. That just kind of showcases the confidence that people are building in. That will be a great time to look at the markets.

Absolutely, fascinatingly poised. Jayasankar, you referred briefly to the tech meltdown. Now, if you look at data as per a recent report by Tracxn, the so-called funding winter in the Indian tech startup system seems to be well and truly underway with a 72% y-o-y decline in investments, $7 billion versus $25 billion last year and hardly around two unicorns that were birthed. So in this scenario -- and I know you're an optimist, do you expect startups, including those that have been incorporated abroad, to perhaps consider listing in India in 2024 on the basis of the overall optimism?

V. Jayasankar:

Yes, there are quite a few conversations we are having with companies, startups, which are incorporated abroad. Some have attempted a listing in the US. And the feedback that they're also getting is that Indian market probably pays a premium for good profitable companies. If you look at many of the startups compared to 2021, where the focus was only growth, growth, growth, now investors and the startups talk about profitable growth. So everyone is very, very conscious that I need to have a path to EBITDA in the near term, I need to generate free cash flows. And the good news is, if you look at Zomato, Nyka, Policybazaar, all of them which are listed, you can see how that momentum towards profitable growth has accelerated over the last one year.

Are there more firms in that league?

V. Jayasankar:

Yes, we are seeing in the startup world, a lot of companies getting prepared to that state where they can go and sell their story that yes, we have cash flows, we have profitable growth. And you should expect some of them to hit the markets immediately after the elections.

Jibi, your take on trends in the startup space?

Jibi Jacob:

More importantly, what people have realized is that if you have a product that is built for India, it is much better to list in your home country. So, you are seeing a lot of conversation wherein people want to onshore their legal entities which were done offshore maybe for a foreign listing. The second aspect is with the tech meltdown, the valuation arbitrage between Indian market and US market so to say, is really not there.

The only one sub sector we feel that people might still consider an overseas listing is the SaaS market, where the depth of US is far more and it's not really a product that you build for India, but it's more for the US and the European market. That trend might continue. But as I said, if the product is built for India, you have a far more serious conversation happening for Indian listing.

Its also very interesting to note, you have the parent, like Unilever or a Nestle, and you have the Indian subsidiary listed here, the valuation difference is anywhere between three to four times, if you look at price to earnings, even by EBITDA or even by revenue. So it really shows that the Indian market has depth for high quality companies and you might have a better value realization in Indian markets.

At Moneycontrol, we have tried to cover new upcoming sunrise segments, where there are listing aspirants. There have been many "firsts" in 2023, like for example, if you look at Ola Electric, the first EV firm, Awfis, the first co-working space provider and if you look at RK Swamy, the first integrated marketing services group to attempt a market debut. Can you name any more niche segments ripe for future IPO activity?

Jibi Jacob:

We are working on the IPO of Entero Healthcare, which is in the pharma services side. It started off like a B2B player, order aggregation and then into far more value-added services. So that's a very interesting space we believe. We also believe there'll be a lot of transactions in the energy transition space. A lot of new energy or green energy kind of stories are coming out to the market. Hopefully in the next six months, we should have a large IPO from that sector. So there are interesting things that are emerging clearly.

Any emerging sectors that you would like to highlight, Jayasankar?

V. Jayasankar:

So I will say Ashwin, " new age companies" are a very, very broad brush right? It covers consumer tech, it covers fintech, EVs, new energy. So that being the case, you will find several new themes coming to the market every year. I think that's going to continue. But for the break in 22-23, for example, Honasa Consumer went public. It was a startup just a few years back, but it grew very, very fast. It started as a digital first company, today it’s a hybrid model. So you are going to find several interesting companies coming to the market on a very regular basis.

We spoke about your picks when it comes to the block deal space. Jayasankar, your three top sectoral picks when it comes to the IPO space for next year, stick your neck out.

V. Jayasankar:

So it is going to be new age, obviously. You are going to see some FIG ( financial institutions group) as always along with healthcare and pharma. And maybe consumer.

Jibi Jacob:

I think pretty much the same. Dominated by technology, financial services, and healthcare, which will be our top three picks.

All right, I have to slip in this question because at the end of the day, it's the moolah that matters, doesn't it? What have been the key trends when it comes to investment banking fees in the equity capital market deals space? The cuts may not be as generous as those in some Asian jurisdictions or the US, but have the fees gone up and are clients ready to pay more to bankers?

Jibi Jacob:

So I would say the fees is more or less been in the same zip code...

Can you give us a percentage perhaps?

Jibi Jacob:

I would say 2% handle, in that zip code. But what has also interestingly happened is the size of deals in India has gone up. So an absolute fee that each banker was making maybe three years back, versus what each banker is making today has gone up, in that sense. Otherwise, it has been a far more stable fee market for all of us.

V. Jayasankar:

I would say it's been very stable for the last few years from a transaction standpoint, and we expect that trend to really continue.