Bottomline | Deleveraging is the primary offer purpose in this season of IPOs

If you thought the slew of initial public offerings (IPOs) hitting the street spell a big bout of capacity expansion, you could be far off the mark. Traditionally, IPOs were opportunities to mop up equity capital to scale up with public money. However, that motivation seems to have undergone a drastic change.

Earlier in the season, we saw a bunch of Offer For Sale (OFS)-heavy offerings, where companies offered private investors (PE investors and in some cases, even promoters) partial or complete exits. These were companies that went public only to diversify their investor base and replace some existing investors with new ones. You could call this refinancing equity, if you will, as there was no fresh equity being added to the company’s kitty.

But that’s not where the refinancing stopped. We took a look at the 15 recent IPOs to gauge the purpose of their public listing and we found that a majority of them were looking to either repay debt or fund working capital with at least part of the fresh proceeds, if not most of it.

Of the 15 recent IPO offers examined, only two did not list 'debt repayment' or 'working capital needs' as a purpose of the offer.

Additionally, of these 15 companies, six had no resources provided for expansion from the offer proceeds. What's more, the total OFS amount stood at Rs 5,600 crore compared to the fresh issue amount of Rs 7,600 crore within these offers. Here too, the fresh issue portion is boosted largely by just one issuer - JSW Infra, which raised Rs 2,800 crore entirely through a fresh issue of shares.

What this suggests, is that a large chunk of the amounts being raised this season is either going to other investors or towards repaying costly debt, at a time when debt isn’t cheap. What this is likely to do, in the short-term, is to boost the bottomlines of these companies as financing costs fall sharply. But this money, in most cases, will do little to drive long-term growth. Hence, these offers should be seen more as refinancing and deleveraging events rather than growth equity events.

It is but natural that a company will come to the public market when it finds that the cost of equity is more attractive than the cost of debt. In fact, some of the recent issuers wish to not only repay long-term debt via equity, but even fund short-term working capital needs via equity financing, and that makes one wonder how cheap equity really is and how frothy valuations can be.

If you are looking to invest in any of the upcoming offers this season, be fully aware of these factors:

What the offer does for the company?

What is its growth trajectory?

Can it generate enough cash to fund its growth?

and Whether the valuations on a standalone basis vis-à-vis peers leaves anything on the table for investors to earn?

If you are unsure, don’t rush to the primary window. Wait for the company to list and wait for it to deliver over a quarter or two before taking your investment decision. Listing pops don’t always last. Don’t let that lure you into subscribing to an offer.

Happy Investing!