India’s stock market rally fuels IPO rush

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India’s stock market rally is fueling a wave of initial public offerings, but some investors have become concerned about the poor performance of several listings in Mumbai.

Investors and analysts said that optimistic expectations for economic growth in India, improving corporate profits and strong demand from foreign investors provide an incentive for deals, as Dealogic data showed that 21 initial public offerings raised about $678 million in January, compared to $17 million a year ago.

More listings are expected: A total of 66 companies have submitted listing documents to Indian regulators, according to brokerage IIFL.

But analysts warn that the 20 per cent rise in India’s benchmark Sensex index over the past 12 months has pushed stock valuations in the country to historically high levels.

“In the near term, strong IPO inflows look set to continue in India,” said Kunal Vora, head of India equity research at BNP Paribas, pointing to strong fundamentals and growth estimates for next year. “The only worry left is the evaluation.”

The list of expected deals includes Ola Electric – which is expected to be among the largest Indian IPOs of the last two years – as well as fintech group MobiKwik.

India’s IPO market rebounded last year as stocks, which had made little progress since late 2021, rose on the back of strong corporate earnings and growing enthusiasm from domestic and international investors. Many foreign investors were looking for attractive growth opportunities after fleeing faltering Chinese markets.

This renewed enthusiasm has helped push the total market value of listed stocks in India to nearly $4 trillion, overtaking Hong Kong to become the seventh largest market in the world. Last year, Indian IPOs raised nearly $8 billion.

“The potential for Indian companies to go public and raise capital is huge, and remains underutilized,” said Nirmal Jain, founder, IIFL. While “the older generation [of company founders] He was very conservative and wanted to keep the information private. . . A new generation has arrived.”

India has become one of the fastest growing economies in the world, with growth expected at 7 percent this year.

It has been a major beneficiary of anxiety over the Chinese economy and geopolitical tensions with the West, with foreign investors pumping more than $20 billion into Indian stocks compared to $8 billion in Chinese stocks in 2023, according to Societe Generale.

The country’s major listed companies have benefited from Prime Minister Narendra Modi’s focus on infrastructure and digitalization, as the government on Thursday announced a hike in public spending in the budget ahead of elections this year.

The digital transformation drive has helped attract millions of new retail investors to India, with the total number of trading accounts in the country rising to a record high of around 140 million by the end of 2023.

However, Société Générale analysts warned that with Indian stocks valued much better than their Chinese counterparts, “the relative strength argument is somewhat weakened”.

An analysis of returns on debut stock sales in Mumbai in recent years also highlights the poor performance of many Indian IPOs, which could mean that local and global investors eventually lose their appetite for such listings.

Demand for IPO shares in listed companies in India since the start of 2021 has outstripped available supply by 44 times on average, with those shares continuing to jump by about a quarter on the first day of trading, according to a recent report from the investment website. YK2 Partners Company.

But two-thirds of those listings continued to lag the broader market, according to the company, which said Indian IPOs “may make sense for investors looking for an IPO, but not for long-term investors.”

One of the most notable examples is Paytm – one of the first tech startups to go public in 2021, which is now trading at Rs 609 per share, about 70 per cent below its IPO price.

Shares of Paytm fell sharply on Thursday after the Reserve Bank of India ordered its payments bank to stop accepting deposits and offering banking services, cutting off a vital growth area for the fintech group. The Reserve Bank of India cited “ongoing instances of non-compliance and… supervisory concerns.” The company said it was complying with the order.

Concerns about IPO performance have led some institutional investors in India to question the wisdom of participating in new listings. Ramdeo Agrawal, head of Indian financial group Motilal Oswal, said his mutual funds would largely avoid initial public offerings this year, preferring to raise capital from companies that already trade on public markets because of greater transparency about their finances.

“IPOs, for serious buying purposes, can be avoided,” he said. “People apply for an IPO and hope for great success… We are in the investment game, not the speculation game.”