Speaking in length about the initial public offerings (IPOs) so far and what awaits the D-Street, Debasish Purohit, Co-head, India Investment Banking, Bank of America, says the markets are ready to absorb the new-age company waiting to hit the Street. Edited excerpts: 

The IPO momentum that picked up in md-2022 has sustained well for over a year What’s giving the secondary market the confidence?

The first quarter of 2023 was rather muted for IPOs. Things started looking up from April/May onwards. While volumes have picked up, we haven’t seen a large IPO priced yet this year; in fact, there been only 3 IPOs of size in excess of ₹3,000 crore. What’s encouraging, however, is the reception to the IPOs, strong after-market, market depth supporting secondary exits and overall market sentiments. I strongly believe 2023 and 2024 will be one of the best IPO years ever, and that we will see multiple mega IPOs come to the market, with a large part of those accessing post-election window, given the lead time to prepare for listing.

Some of the IPOs this year have come out with very benign valuations vis-à-vis the 2021 rush. Was it design or default?

Ultimately, pricing and valuations are a function of demand and supply. Through the course of the last three years alone, we have been through opposite ends of the demand-supply spectrum. While domestic flows continue to stay strong, foreign flows have reacted to global cues on geopolitics, rate cycle and global growth outlook. With so many variables, it’s difficult to plan for the perfect market backdrop. The current market window is as good as it gets, and we expect backdrop to be even better going into next year.

M&A activities are also picking up now, especially in the financial services space. Do you see this as a first sign of consolidation, or is the need for scale pre-empting these decisions?

I think financial services opportunity is large and there is space for everyone. Companies are definitely exploring inorganic opportunities that could catapult them into their next growth cycle, either in terms of addressing white spaces or newer markets, with buy versus build debate driving sensible valuation discussions.

This wasn’t the case in 2008 when we saw massive outbound deals happen…

I think people have learnt from their past mistakes. Moreover, domestic opportunity is far outsized, compared to what it was a decade back. Corporate balance sheets are at their strongest and PEs have abundant dry powder. Strong public market multiples drive private deal benchmark threshold higher; however, buyers need to price in global macro uncertainties and higher cost of capital. I think this tug of war will continue for some more time in certain sectors, making M&A cycle a bit longer. But at the same time, in pockets, such as energy transition, healthcare, deals are active. 

We’ve also seen a lot of private equity investors use the market wave to monetise investments. Are the PEs finally getting the depth from the bourses?

Absolutely. There was lingering concern last year if post-market supplies from tech listings will find sufficient market depth. I believe we have done extremely well on that front, talking from our own experiences of leading several strategic/sponsor exits this year. The confidence that pre-IPO investors can monetise their position organically and systemically over time bodes extremely well for forthcoming IPOs.

Many new economy companies’ IPOs are expected next year, while the market is yet to be receptive to ones already listed. Have the sentiments improved?

The narrative has clearly shifted from growth at all cost to focus on profitability. Listed companies have largely responded well to the market and investor expectation and changing sentiments are evident in stock re-rating and strong investor reception to secondary blocks. IPO markets are ready to welcome new economy companies next year and beyond.

But growth is the cornerstone for new age companies?

Agree, growth is their lifeline. A business must do what’s right for them and eventually market values these businesses for their growth story. It’s just that public market expectations have shifted from growth at all cost to growth with profitability.

These companies have also innovated metrics like operating profits minus ESOPs etc…

Investors expect a real, clean EBITDA and no multiple levels of adjustments.

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