Market Trends Impact on IPO Success

The stock market goes through periods of ups and downs or a period of no trend, where the market trades in a narrow price band. These different trends of the market play a pivotal role in deciding the success, timing, and pricing of the IPO. In this article, we will discuss how these trends in the market impact the IPO listing. Also, we will try to understand why companies may delay or rush with their IPO according to market trends and what investors should consider when a company comes with an IPO.

What is an IPO?

IPO is an important milestone for any company going public. It is the process during which a private company issues its shares to the public for the first time to raise capital. The capital raised by the company could be used for business expansion, debt repayment, or growth initiatives. The IPO not only helps the company to raise capital but also improve its credibility and introduces liquidity to early investors. However, a company’s decision to go public is largely determined by external factors – most notably by the market condition.

Let’s first understand the two main market conditions – the bull market and bear market and how does it impact investor behavior.

Bull Market

One of the main characteristics of a bull market is the rise in stock prices. During a bull market, investors are more confident and the outlook is generally optimistic. As a result, investors are likely to take greater risks in the hope of higher returns during a bull market. This makes a bull market an ideal environment for a company to launch an IPO. Companies tend to get better valuations during a bull market, thereby maximizing their returns from an IPO.

Bear Market

Contrary to a bull market a bear market is characterized by falling stock prices. Also, during a bearish phase, investor confidence is low and they have a cautious approach towards new investments, including IPOs. Due to this companies coming with IPO during a bear market may see reduced valuation. During a bear market, companies tend to delay or reconsider the timing of their IPO launch.

Market trend plays a crucial role in determining the success of an IPO. Companies coming up with an IPO choose the timing carefully, to take advantage of market conditions to maximize their capital and boost their public image.

How Bull Markets Fuel IPO Activity?

In a bull market, IPO activity surges as companies cash in on the favorable investor sentiment and rising stock prices. Here is how a bull market fuels IPO listings:

Higher Valuations and Increased Demand

When the markets are bullish, investors are more optimistic. Companies coming up with IPO take advantage of this optimism by pricing their shares more aggressively, knowing that demand will support a higher offer price. As a result, companies raising capital in a bull market often get better results and raise more capital.

Investor Confidence

During a bull market, investors are more confident of getting better returns on their investment and are willing to invest in relatively riskier ventures like an IPO. This demand may translate into higher trading volume and can drive up the stock price on the first day (listing day) of trading on the exchanges.

Positive Market Sentiment

In an upward trend in the stock market, investors believe that economic times are going to be good. Such a sentiment provides an excellent opportunity for companies to go public by issuing their shares to the general public. Historically, many tech and high-growth companies have chosen to go public during bull markets as investors are willing to take more risks and are attracted to new, innovative companies.

Strategic Advantage

A successful IPO in a bull market will give the company a strategic advantage over its competitors. The funds received from the IPO could be utilized for further growth initiatives, research, and development. This will help the company gain market share while the market conditions are still favorable.

Bear Markets: A Cautious Approach to IPO Listing

In contrast to a bull market, which is characterized by increasing stock prices and higher investor confidence the picture in a bear market is the opposite with falling stock prices and cautious investor sentiment. Here’s how bear markets influence IPOs:

Lower Valuations

In a bear market, the investors are hesitant to make any new investment. Companies coming with an IPO might be forced to go with a lower floor price than what they would have otherwise done in a bullish market phase. With a reduced floor price, companies will raise less money and thus make it harder to achieve financial goals.

Postpone IPO Timing

If the companies want to avoid a lower valuation they may delay the IPO till the time market conditions become favorable. For example, many companies during the COVID-19 downturn simply did not launch their IPO till the time investor confidence improved and market conditions turned better in late 2020. Delaying the IPO will however impact the growth plans of the company.

Selective Investor Behavior

In a bear market, as investors are more cautious with their investments, they tend to focus on known and reputable companies and avoid riskier investments like IPOs.

The Impact of Negative Sentiment

In a bearish market where the investors are already cautious any negative news or underperformance will make the investors more jittery and can have a substantial impact on the new IPO. Investors will be quick to withdraw their money from riskier assets, which may result in a significant drop in the price of stock post-IPO.

How Indian Companies Adapt to Market Cycles?

Reduced Offering Size

In a bearish or uncertain market, the company might decide to offer a lesser number of shares than originally planned. This approach will help the company gauge investor interest and mitigate risks without fully committing to a large IPO. Offering a few number of shares in a bearish market can help the company to reduce potential losses if the demand is low.

Exploring Overseas Markets

If the market conditions in India are not favorable, some companies may explore international exchanges for favorable conditions to gain access to a broader investor base. Example: Infosys and Wipro have been listed on the NYSE to reach international investors.

Postponing the IPO

Companies may choose to delay their IPO during a bear market. An unfavorable market condition can result in lower valuation and reduced demand, so companies wait for market conditions to turn positive to proceed with the IPO. Example: LIC had to postpone their IPO plans until investor confidence and market conditions improved.

Timing with Bull Markets

During a bull market, investor confidence is high and they are willing to take more risk. Companies tend to launch IPOs in these conditions to capitalize on strong demand and favorable pricing.

Example: Many companies listed successfully during India’s bull market in 2021, including Zomato and Nykaa, due to the favorable market environment and strong investor sentiment.

Tips for Indian Investors Considering Investing in IPOs

For Indian investors interested in investing in an IPO, here are a few factors to consider.

Know the Industry of the Company coming with the IPO and Market Timing

Certain industries are better positioned to perform well during specific market cycles. For example, technology and consumer services (Lifestyle services) might perform well during bull markets, on the other hand, consumer staples (everyday essentials) and Utilities (Essential Services) companies may offer stability during bear markets.

Understand Company Fundamentals

Evaluate the company’s financial health, business, and revenue model. While market conditions may impact short-term performance, it is always strong fundamentals of a company that make an IPO a good investment, regardless of the broader environment.

Diversify Your Portfolio

“Don’t put all your eggs in one basket”. Investing in an IPO is inherently risky, especially when the markets are volatile. Diversifying your portfolio will help you to balance the risks.

Knowledge of the market cycle

Knowledge of market cycles can help Indian investors time their investments effectively. While a bull market can provide strong IPO performance initially, a bear market may also open up long-term value opportunities, provided the company has a robust growth outlook.

Conclusion: Market Trends Impact on IPO Success in India

Trends in the market can have a significant impact on the timing and success of IPOs in India. While a bull market provides favorable conditions with better valuations and greater interest from investors. A Bear market prompts caution and may delay the IPO. Although companies will try to time their IPOs in coordination with these market trends, investors can benefit from understanding how these conditions influence the IPO.

Happy IPO Investing!