PE-backed IPOs to stay on course despite market volatility

Rs 13,614-crore capital was raised across 21 companies through IPOs last year, highest in past five years

The pace of private equity (PE) exits through listing of their investee companies does not seem to be abating despite the volatility in stock markets, say merchant bankers. Currently, 16 companies have market regulator Securities and Exchange Board of India (Sebi)'s approval to launch their IPOs. Besides, five more have already applied for approval - all PE-backed. In 2015, just 12 companies backed by PE investors went public.

IDFC PE-backed GVR Infra and Parag Milk Foods; International Finance Corporation (IFC)-backed Equitas Holdings; Indivision India Partners-backed VLCC Healthcare and Sequoia-backed Quick Heal Technologies are among those that have already received the approval. Besides, Kotak India Venture Fund-backed Advanced Enzyme Technologies and IFC-backed Ujjivan Financial Services are among those that have applied for it. Moreover, there are many more expected to apply in the coming quarters.

"Markets were volatile even last year. It is just that it may take a little longer to bridge the valuation gap, if any, between issuer and investor expectations. But, the market continues to be vibrant for IPOs and is not showing any sign of a slowdown," says Subhrajit Roy, head - equity origination, Kotak Investment Banking. "We are also seeing average deal sizes increasing from the sweet spot of Rs 400-Rs 600 crore last year to Rs 800-1,000 crore this year," he says. Kotak Investment Banking expects Rs 20,000 crore to be raised across 20-25 IPOs in 2016.

According to Prime Database, a financial consultancy firm specialising in primary market issuances, capital worth Rs 13,614 crore was raised across 21 companies through IPOs last year. This was the highest in the past five years. Of this, capital worth Rs 4,830 crore was raised by 12 companies that were backed by PE investors. This saw PE firms such as New Silk Route and ICICI Venture making exits worth Rs 2,350 crore at the time of listing for their investee companies.

"Secondary markets have been volatile due to various factors and owing to this, valuations are likely to be impacted compared with those in a bullish market," says Ajay Saraf, executive director, ICICI Securities. Companies planning to go public, or looking to offer exit to promoters, should be fundamentally strong, reasonably valued and have a good track record in this market.

"The crucial drivers for the capital markets will continue to be the valuations. Besides these, uniqueness of business models, PEs needing exit and capital requirement pressures are some of the other drivers that may boost IPOs in the coming year," he says.

Sensex, the benchmark index of BSE, closed at 24,225 on Wednesday, near 20 per cent down from its all-time peak last year. But this does not seem to deter merchant bankers. "If you look at the second half of 2015, the markets had already started to correct, but at the same time the primary market was quite robust with a lot of healthy IPOs," says Arvind Vashistha, head of equity capital market origination, Citi India. "We believe the market will continue to reward good strong investment stories that are backed by the right promoters and investors and are priced correctly. Even though there is volatility and global developments will have an impact on the secondary market, the overall investor interest in India and for high quality Indian IPOs is positive," he says.

But Pranav Haldea, managing director, Prime Database, advises caution. "Even if there is pressure for exits from PE investors, typically you would see that the pipeline goes to the cold storage when there is a lot of volatility in the secondary market, which saps demand. However, we will continue to see a few highly credible stories with reasonable valuations hitting the IPO market."