Initial Public Offering (IPO) has become increasingly popular over the last few years.

The S&P BSE IPO index, which is designed to measure the performance of companies, could be used as a proxy to adjudge the performance of an IPO.

See detailed snapshot below of BSE S&P IPO and comparison with respect to BSE S&P Sensex:

In terms of the number of issues and amount raised from the primary market, IPO has been able to perform exceedingly well over the past couple of years

YearNo. of IPOsAmount Raised (Rs Cr)Issue SucceededIssue Failed
200710833,9461044
20083918,340363
20092219,307211
20106636,362642
2011406,044373
2012136,770112
201351,28432
201471,20152
20152111,362210
20162726,372261
20173875,475380
2018*1824,125180

IPO market has shown no sign of slowing down due to events like demonetization and Goods and Services Tax (GST). But the question is, will this track record continue in 2018?

Well, there is no simple and straightforward answer to this question. The success of IPO market depends on multiple factors including:

  • Economic reforms
  • Requirement for capital
  • Post-IPO performance of companies
  • Subscription rate
  • Political factors

Factors Affecting the IPO Movement

1.Economic Reforms:

The government implemented multiple reforms such as GST, Real Estate (Regulation and Development) Act (RERA), Insolvency and Bankruptcy Code (IBC) etc.

These reforms have strengthened confidence among investors, including retail investors that have resulted in the strong performance of IPO’s in 2017 and H12018. With continued support coming by way of economic reforms, the IPO market is likely to flourish.

2.The Requirement for Capital:

Rising demand for capital will remain a key driver for IPO markets to flourish. Micro, Small and Medium Enterprises (MSME) who are in need of funding for working capital and expansion, will continue to translate to IPO market.

3.Post-IPO Performance of Companies:

Strong performance by newly listed companies (see the chart above for S&P BSE IPO) have reinstated the confidence among retail investors, thereby prompting them to continue investing in IPOs.

4.Subscription Rate:

Behavior tends to impact IPOs. Thus, if an IPO is oversubscribed, it indicates strong demand for the company’s shares and inculcates the fact that the company’s listing will be better than the price band offered.

Off late, the IPOs have been subscribed multiple times which indicates the faith from the investor’s community in the IPOs.

5.Political Factors: 

It is an invisible factor that plays a pivotal role in the market.

A political event has a lasting impact on our country’s capital market, including the IPO market. With the country going into the general elections next year, more transactions are likely to take place this yeat

We believe that if the ongoing IPO rally continues, which we believe will continue; the following sectors will see a strong demand:

1.Financial services – This would include banking, non-banking financial company, insurance and asset-management
2.Defense and railways
3.Hospitality and leisure
4.Chemicals, and healthcare

Lastly, we believe that a lot of start-ups will see a significant rise in the overall listing. We also believe that Internet-based start-ups along with fintech start-ups will continue to drive the IPO avenue over the medium term.

Happy Investing!

Disclaimer: The views expressed here are of the author and do not reflect those of Groww.