Domestic capital to drive primary market activity in 2023

With this positive push from domestic investors, large companies like LIC and Delhivery listed in May. But the big game changer in 2022 was when foreign institutional investors (FIIs) turned positive in July-August, with August recording massive FII buying of Rss 540 billion. Secondary markets picked up pace as quality stocks saw strong appetite, which was reflected in large secondary trades. Major block deals were executed in the second half of the year acting as exit routes for PE investors and monetization routes for promoters. With Indian indices outperforming global peers, the IPO market also started seeing increased activity with 40 companies raising ₹594 billion in 2022.

However, 2022 saw deviations from trends observed in 2021. Primary markets saw a substantial reduction in Qualified Institutional Placements (QIPs) by 73% compared to last year, majorly impacted by subdued capex, global headwinds and increased market volatility. Average size of IPOs also decreased by ~47% in CY22 compared to last year, which can be attributed to valuation rationalisation and lower Offer for Sale (OFS) components to maintain scarcity premium through low float.

Further, SEBI continued to be ahead of the curve and passed some significant amendments that strengthened the primary markets like confidential filing of DRHPs to help companies protect sensitive business information and enhanced KPI disclosures to bring in transparency in IPO investing. It also changed the lock-in period for promoters and pre-IPO investors, which is expected to boost investor confidence in the issue and deter large sell-offs immediately after the lock-in expiry, thus leading to price stability, creating a win-win situation for all. On the listed side, OFS relaxation was done for large shareholders from 10% to 5%, which will make more shareholders eligible to use OFS through stock exchange mechanism, thus deriving a better price for them.

With this backdrop, we believe 2023 to be a year further impacted by global volatility. Measures taken by global central banks to control inflation will also have a major bearing on behavior of FIIs. Also, with the underperformance of China in 2022, there could be a flow of foreign capital back to China this year, if the current covid fear subsides. What gives us comfort is that despite such global events that move in/move out foreign capital very quickly, DIIs will continue to be major drivers of the markets and we expect to see strong activity in capital markets. We believe that on the listed side, stake monetization through blocks and OFS will continue to be a big theme as global funds who are sitting on massive returns could choose to book some profits given the continued global macro headwinds. Similarly, early investors in companies who can potentially make good profits would be expected to either exit completely, or at least book a portion of these profits.

After a major drop in 2022, QIPs are expected to gain traction this year across different sectors as more companies are expected to raise funds, driven by the ongoing private capex cycle, majorly in infrastructure, construction materials, autos, and selectively in financial services.

Mid-size IPOs anchored by domestic funds are likely to be the theme in 2023 following a similar trend like last year, as only profitable companies with strong fundamentals and reasonable valuations, both in relative and absolute sense, are expected to see good appetite from institutional investors. New age tech companies which are profitable or demonstrate clear path to profitability in the near term, are expected to gain investor interest. Tech blocks which saw capital inflow from both global and domestic investors in the last two quarters of CY22, will gain further traction in capital markets this year with these investors being the major anchors.

We expect capital market action in some of the defensive sectors like pharma, healthcare, utilities, and consumer staples. Large-cap IT stocks will also regain momentum with increased fund inflows driven by their growth in top-line and margins.

Following the global trend, private companies which are focused on sustainable energy and reduction of carbon footprint will start gaining traction from global investors who are specially focused on ESG. Globally, ESG as a theme has gained a lot of traction last year contributing to a large percentage of overall Assets Under Management (AUM). Following a similar trend, various global ESG-oriented funds are focusing on India and recording huge capital inflows. Also, various ESG schemes are being set up by large mutual funds who are taking an active stance on ESG issues, with special adherence to governance practices.

Overall, India is expected to see high momentum across both the primary and secondary markets, with strong support from both domestic and foreign investors. Though there can be temporary challenges driven by both global and local factors, but we believe that there is strong potential for growth and development of the market ecosystem in India in the years ahead.

Gaurav Sood is managing director and head of Equity Capital Markets at Avendus Capital.