Market Views: Will India’s IPO market scale new highs in H2?
India’s surging stock market has been in the spotlight for several months now.
Accompanying this is a red-hot initial public offering (IPO) market, one of the hottest and best-performing globally in the first half of 2024, buoyed by surging valuations and promising economic fundamentals.
Between January and July, more than 150 companies raised nearly $5 billion through IPOs in India, nearly double the amount raised in the same period last year, according to LSEG data.
The biggest IPOs span various sectors including technology, financial services, infrastructure, and biotechnology. A notable example is SoftBank-backed electric scooter maker Ola Electric's $734 million debut in early August.
In the coming months, at least 15 companies are preparing to make their public market debut, potentially raising a combined $11 billion, Bloomberg-compiled data showed.
Among them is the $2.5 billion offering of Hyundai Motor's Indian unit, set to be one of the largest on record in the country.
The MSCI India, a widely tracked benchmark for international investors, is trading at a price-to-earnings (P/E) ratio of 24. Meanwhile, the Nifty 50, comprised of India's top 50 stocks, is trading at 21 times based on one-year forward earnings and has climbed 15% year-to-date.
We asked fund houses for their outlook on the IPO market, and implications for foreign institutional investors in both the public and private markets.
The following responses have been edited for brevity and clarity.
Deepika Mundra, Indian equity research director
M&G Investments
The Indian IPO market has demonstrated remarkable resilience and growth, making it a focal point for investors worldwide. Over the next six months, this trend is expected to continue, driven by a surge in liquidity events following the recent election results and the union budget announcement.
India's robust economic growth serves as a key driver, fostering business expansion and bolstering investor confidence. The regulatory environment is also evolving positively, with the Securities and Exchange Board of India (SEBI) streamlining IPO processes while exercising enhanced diligence on disclosures and use of proceeds.
Currently, India boasts approximately 1,600 companies with market caps exceeding $100 million, growing annually by mid-single digits, offering ample opportunities for active fund management and outperformance.
We anticipate significant activity across diverse sectors such as technology, renewable energy, construction, financials, healthcare, consumer goods and automobiles. This sectoral diversity not only creates opportunities but also ensures a stable market foundation.
For foreign institutional investors, the Indian IPO market presents multiple opportunities, especially given their light positioning in India. Equities offer increased possibilities for portfolio diversification and potentially high returns, though due diligence is crucial with the influx of new market entrants.
In public market investments, the landscape offers shorter holding periods due to increased IPO exit opportunities and higher valuations as companies seek robust pre-IPO rounds. Domestic investor competition in private equity deals is also intensifying.
The primary drivers of this growth include strong economic fundamentals, government initiatives promoting entrepreneurship, and increasing domestic investor participation.
However, investors must be cognisant of risks such as global economic uncertainties, potential regulatory changes, geopolitical tensions, and possible market corrections.
Concerns about overheating, particularly in sectors like technology and renewable energy, are valid. Some valuations appear stretched, necessitating a cautious approach. Selectivity in IPO participation is advised to mitigate risks if earnings fail to meet high valuations.
Mahesh Natarajan, head of equity capital markets for India
Nomura
India remains a bright spot globally with strong underlying economic fundamentals. Hence, investor interest in India and as a consequence, deal-making, both on the private and public sides, should be expected to continue.
Despite initial volatility, markets welcomed the Union Budget 2024. Concerns about jobs and slump in demand have been addressed with higher provisions to boost spending in the agricultural sector as well as providing incentives for employment generation.
Foreign institutional investors (FIIs) who had waited out to avoid election event risk are returning and increasing their allocation to India. FIIs have pumped in about $7 billion post elections, bringing net inflows to around $4.3 billion year-to-date.
Equity capital market activity has been strong with around $26 billion being raised so far versus $32 billion in 2023. India continues to remain one of the most active IPO markets in the world. Currently, 37 DRHPs (registration documents) have been filed with SEBI and 16 of them have approval.
We expect more companies to tap the equity capital markets for IPOs and follow-on offerings, benefiting from the buoyant market conditions and strong underlying fundamentals in the medium to long term.
On the valuations front while there could be short periods of correction, the long-term earnings growth potential will guide price movement.
Key risks continue to be geopolitical in nature and any adverse global development that could impact corporate earnings growth or the capital markets in general.
Private equity activity is expected to be robust this year, both on the investment front, given the significant amount of dry powder available, as well as on the exit front, as financial sponsors look to monetise their investments.
Alexander Treves, head of emerging markets and APAC equities investment specialists
JP Morgan Asset Management
The positive investment case for India has been reinforced by several factors, including sustained growth, blue-collar job creation, fixed capital formation, and premium and discretionary consumption. The expenditure on improved infrastructure is highly encouraging.
In this context, Indian domestic mutual funds are experiencing strong inflows. According to some estimates, domestic mutual funds hold $15-20 billion of excess cash, providing sufficient liquidity to meet IPO demands.
The IPO market is also supported by favourable macroeconomic conditions and political stability, offering visibility on growth. Companies looking to capitalise on this growth are increasingly turning to equity markets for funding.
Domestic investors have become more influential in the success of an IPO, typically requiring some value to be left on the table. As a result, despite increased deal activity, IPO valuations may not be as inflated as in the past.
However, valuation remains a key challenge for the broader equity market, with certain stocks trading at elevated multiples. This is partly reflected in the trend of foreign companies with Indian subsidiaries looking to capitalise on higher valuations by listing those subsidiaries in the Indian market.
We have been aligning our India equity strategy accordingly. In our view, traditional areas such as information and technology (IT) services and consumer staples are unlikely to see the same performance or tailwinds they have enjoyed over the past two decades.
While their fundamentals remain solid, the rate of growth is unlikely to match historical levels, and some valuations remain stretched. Therefore, our holdings in these sectors are very selective, and we have increased our exposure to more cyclical names.
Anand Gupta, lead portfolio manager for Indian equity franchise
Allianz Global Investors
The Indian IPO market remains vibrant, driven by approximately $500 billion in FDI over the past decade. A significant portion of this FDI has transitioned from private equity to public markets, presenting dynamic opportunities for institutional investors.
The digitisation of India has also been a catalyst, with 600 million new internet subscribers and a significant drop in data costs over the last seven years, contributing to the opening of over 100 million new investment accounts in five years.
Enhanced regulatory measures have bolstered transparency and risk management, fostering sustainable growth in both IPO and secondary markets.
India continues to exhibit the fastest growth outlook among emerging markets, as indicated by projections from institutions like the World Bank and International Monetary Fund.
With the normalisation of corporate earnings in India following past exogenous shocks such as demonetisation, goods and services tax (GST) implementation, and the Covid-19 pandemic, the country's margins and return on equity have also expanded.
While initial valuations may appear high, the market's low correlation to other emerging markets enhances portfolio diversification. The Indian benchmark index has a higher proportion of high-quality sectors such as consumer staples, consumer discretionary, and IT services. In contrast, it has a much lower representation of state-owned enterprises and commodity sectors than other emerging markets.
A bottom-up approach to stock selection can identify attractively valued companies across various sectors, supported by ongoing reforms and digitalisation. While potential risks exist, such as market volatility and geopolitical factors, the long-term investment thesis in India remains strong, with a large, liquid market offering low correlation and diversification benefits compared to other emerging markets.
Liu Minyue, investment specialist, APAC and global EM equities
BNP Paribas Asset Management
We remain constructive on the outlook for Asian equities. Our long-term strategy for Asia focuses on the key themes of foreign direct investment (FDI) growth, upgraded domestic demand and consumption as well as innovation and technology.
On the market level, we are selective on the growth opportunities in India. India has a favourable demographic trend and improving labour productivity. Together with some ASEAN peers, India is likely to benefit from supply chain diversification and the ‘China + N’ strategy.
Although it will take some time for India to grow its tech manufacturing ecosystem, we expect India to benefit from it in the mid-to long-term.
Although Indian equities saw a sharp drop after the election result in June – it rebounded and strongly recovered only after a few hours when policy continuity is confirmed. The IPO pipeline is big post-election – and we are actively looking for new opportunities beyond the financials, consumer and automotive sectors.