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India awaits $3bn IPO
deluge
By Indrajit Basu
KOLKATA - The floodgates could be about to open,
and India's primary market is praying that it doesn't
get soaked. According to industry sources, some of the
best Indian companies from across industries are
planning to raise US$3 billion this year: the primary
market in India seems set for the much-awaited revival
and the return of the small investor.
"At no other time in the history of
capital markets have so many blue-chips-in-the-making
lined up
to offer their stocks," said Prithvi Haldea, managing director of
Prime Database, the equity research outfit that
tracks initial public offerings (IPOs) in the country.
The last time that India saw a thriving
IPO market was seven years back, according to the
Securities and Exchange Board of India (SEBI), the county's capital
markets regulating authority. At last count, 84 companies had
plans of listing, with the top 10
alone accounting expected to raise $3 billion. (The other 74
companies haven’t formally filed for approval, so their price details
are not available).
For investors, the lure is in
the names behind the stock offerings. For example, Tata
Consultancy Services - Asia's largest and most valuable
but still unlisted software services company, Maruti
Udyog - India's largest carmaker that has Japan's Suzuki
as the majority stake holder, Biocon - the country's
largest biotech company, Daksh e-Services - one of top
five IT enabled services (ITES) companies, Idea Cellular
- in the top three mobile phone operators with AT&T
as a stakeholder, LG Electronics - the Korean electronic
giant, are some of the companies that will be going
public for the first time. Since these are expected set
industry benchmarks, analysts say that they could make
some of the most attractive bets.
"I am quite
upbeat about the primary market," said Shitin Desai,
vice chairman and managing director of the merchant bank
DSP Merrill Lynch, adding, "Investors in India can
finally look forward to buying stocks with a good track
record and attractive valuations after a gap of seven
years."
The current surge of interest of Indian
companies in floating IPOs is a far cry from the past
few years when only exceptionally brave or foolish
companies ventured into the market. For instance,
mobilization during the past five years has been just $2
billion. And, the recent IPO surge is despite few signs
of the secondary market shaking off its ennui.
So, what's causing the sudden turnaround? "It's
hard to pinpoint any one reason," said Rahul Dhawan,
head of research, SKP Securities. "A relatively
insulated economy, strong corporate performance,
undervalued markets and investors shifting focus to
equities because of lowering of interest rates could
trigger a bull run in IPOs."
But it would be
naive to presume that these alone could lead to such a
dramatic reversal of sentiment. According DSP Merrill
Lynch, the turnaround is more likely the consequence of
a number of other factors - the overall improvement in
growth prospects, both in India and abroad, the working
through of excess capacity created in the heady days of
the mid 1990s, the pick-up in the pace of privatization,
and the realization that investors have few alternative
avenues for investment in the backdrop of the
ever-sliding interest rates in the economy.
But
that's not all. Analysts say that the SEBI has more
powers than it ever had, and that means scams will be
dealt with more swiftly and severely. For example, SEBI
has the power to impose a fine of three times the
profits if a company indulges in insider trading.
Listing has been made easier, and the "three-year
continuous profit" clause may soon go. More importantly,
most of the stocks are quoting at bargain prices - a
great time to buy. Says Ravi Mehrotra, president,
Franklin Templeton Investments, "The risk-reward
equation has shifted in favor of equities, since debt is
not expected to yield more than 6 percent to 7 percent
going forward and equities are looking very attractive."
What has added to the optimism of the investment
bankers is that despite its depressing performance in
2002, valuations in the US markets still continue to be
high, forcing foreign financial institutions to take a
serious look at the emerging markets. "And being an
emerging market, India could well be a major beneficiary
of this boom since its shares are still attractively
priced," said Desai adding, "even a small fraction of
the smart money to emerging markets could help Indian
markets considerably."
Some however, are still
skeptical. Dhirendra Kumar of Value Research says that
while 84 IPOs have been lined up, only a handful have
sought approval from SEBI. He also says that some
companies that have priced their IPO too high could act
as dampeners. For instance, India's largest carmaker
Maruti Udyog's IPO price of $48 per share is too steep
for small investors, feels Kumar. Others, however, say
that for Indian investors, who save $100 billion every
year, funds are not an issue, but getting investor
confidence and enthusiasm is.
And, they add, the
fundamentals of the Indian economy are now good enough
to bring investor confidence back. As instances
economists cite that Indian exports have been growing at
rates better than expected; inflation is still under
control; industrial growth is reviving; and most
importantly, going by recent investments trends, it
appears that foreign institutional investors are ready
to bet on India.
Moreover, "If the offer price
is right, investors are waiting in the wings to gobble
them up," said an analyst of Kotak Mahindra Finance, one
of the country's largest finance companies. "After all,
with returns from other investments avenues like debt
instruments, property and bullion dwindling fast, where
else could one put money in."
Buoyed by the
current IPO frenzy, analysts are also hoping that it
will trigger a bull run in the secondary markets.
Historically, though, it has been the other way round: a
thriving secondary market preceded an IPO boom. However,
this time round, analysts say technology has made both
markets more interrelated.
"IPOs have a salutary
effect on secondary markets as long as they enlarge the
universe of quality stocks available for investment,"
says Dhawan. "The current regulations and 100 percent
book-building route [introduced in the country recently]
will lead to a supply of quality stocks that can provide
a fillip to the secondary market."
"And the buzz
is, India's Finance Minister Jaswant Singh will deliver
a market-friendly budget in February [slated on February
28]," said the latest report of DSP Merrill Lynch. "A
sustained rally in the secondary market could in turn
give a fillip to IPOs."
(©2003 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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