2024-07-12 04:16:16
While some foreign fund managers are wary of India’s overvalued stocks, equity issuance in the country has surged as companies take advantage of a bull run in equities and a surge in flows from local investors.
Data from Dealogic shows that in the first half of this year, India’s stock market raised more than $28 billion, a record high and up 198% from the same period in 2023. In contrast, issuance in other parts of Asia outside Japan fell 32%.
The frenzy of activity among Indian companies is helped by the fact that India is the world’s largest economy with the fastest overall growth rate (the International Monetary Fund predicts it will expand by 6.8% this year), a stable currency and strong corporate earnings.
Also helping the stock market was investors selling Chinese stocks, which have fallen sharply in recent years, with the MSCI China Index underperforming the MSCI India Index by 61% over the past three years.
“Market momentum, demand dynamics, everything is strong,” said Arvind Vashistha, head of equity capital markets in India at Citigroup Inc., the largest underwriter of Indian stocks so far this year, according to London Stock Exchange Group data.
“We’re hearing people say, ‘Look, give us some more debt,’ ” he added, referring to investor appetite for further bond issuance. “We don’t think this momentum is really going to slow down in 2024 and 2025.”
More than three-quarters of the issuance was in the form of secondary offerings, with multinational parent companies, Indian founders and buyout funds looking to cash in if the share price continues to rise following the IPO.
Several large companies are expected to go public this year, including the local subsidiary of Hyundai Motor, which is expected to raise up to $3 billion.
Food delivery company Swiggy has filed for a $1.3 billion IPO, while electric scooter company Ola Electric has received regulatory approval to raise $660 million in its market debut.
India is “an important cornerstone of economic activity in the region,” said Edward Byun, co-head of equity capital markets for Asia ex-Japan at Goldman Sachs in Hong Kong. “The market is clearly hoping for more leaders to emerge to expand investment opportunities.”
A key factor driving local demand is that more Indians are choosing to invest their savings in stocks rather than traditional storeholds of wealth such as gold or real estate.
Assets under management at Indian mutual equity funds have more than quadrupled to 2.77 trillion rupees ($332 billion) since March 2020, according to data compiled by Mumbai-based financial services group Motilal Oswal.
Yet many overseas investors are put off by India’s lofty valuations — the Bombay Stock Exchange’s Sensex index currently trades at 25 times expected earnings, one of the highest in Asia, according to Bloomberg data.
Some are also concerned regarding the supply of shares in India’s stock market and the poor performance of many new stock offerings: Indian IPOs have an average first-day gain of 25.4%, compared with a global average of 52%, according to Dealogic.
Meanwhile, secondary market issuance in India rose 2.2%, compared with 10% globally.
Inflows from foreign institutional investors have remained flat this year, according to data compiled by Motilal Oswal.
“There is some concern,” said one investment banker. “India has never seen such a large equity offering before, coupled with valuations that are near all-time highs.”
Perris Lee, director of ECM insights for Asia at ION Analytics, said the Nifty 50 index had more than tripled in the past decade and “some degree of correction was due”.
“But as long as the economy keeps moving forward, this won’t stop the stock market from growing and maturing,” Lee added.
However, others argue that the high P/E ratio is justified because of the rapid growth rate.
“You get what you pay for, and the runway is long, which is why the multiples look high,” said Rajiv Jain, chief investment officer at Florida-based GQG Partners, which has more than $20 billion invested in Indian stocks.
India has “reached a point where it is hard to ignore, simply because of the size and scale of its growth,” Jain added.
The Nifty 50 and BSE Sensex have also surged following a brief decline last month following a surprising election result in which Prime Minister Narendra Modi’s Bharatiya Janata Party, which investors see as a boon for growth and stock performance, lost its parliamentary majority.
“The good news is that the election results have been well-received,” said Subhrajit Roy, head of global capital markets in India at Bank of America Corp. He expects record equity issuance this year and even stronger issuance in 2025.
Besides Hyundai Motor’s blockbuster IPO expected later this year, several bankers see more multinational companies considering listing their subsidiaries in India.
Mahavir Lunawat, founder of Mumbai-based Pantomath Financial Services Group, said foreign companies started delisting from India decades ago, such as Cadbury India.
Now “a lot of these big companies are looking at India,” he added. “The market has depth, the valuations, the demand.”
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