IPO rush unlikely to hurt surging secondary market
The IPO market is strengthening, with companies raising (or about to raise) nearly Rs26,000 crore in funds and an even stronger pipeline in the offing
Mumbai: The initial public offering (IPO) market in India is strengthening, with companies raising (or about to raise) nearly Rs26,000 crore in funds and an even stronger pipeline in the offing.
Yet market strategists aren’t too worried about attention being diverted from the secondary market, which is hovering near record high levels.
In fact, it is a surging secondary market that is encouraging many companies to hit the equity market for capital, as they eye better valuations.
In intraday trading BSE’s Sensex rose as much as 0.73% on Monday to a high of 32,508.06 points, and closed at 32,423.76, up 0.47%.
For the year to date, it has gained 21.77%.
Some market experts are of the opinion that this IPO rush will attract more flows into the market, because of renewed interest.
“It won’t affect the markets adversely as more money will come in,” Neelkanth Mishra, India equity strategist at Credit Suisse, said in an interview on Wednesday.
“Take insurance, which is a large part of the current IPO pipeline: in India, it is a secular growth market with low penetration, and rising financial savings has seen good growth of late. So, if you are a global sovereign wealth fund (SWF) or a strategic investor in India, why would you not want to build a meaningful position in these businesses?” said Mishra.
General insurer ICICI Lombard General Insurance Co. Ltd’s IPO to raise to Rs5,700 crore opened on Friday, while life insurer SBI Life Insurance Co. Ltd’s Rs8,700 crore IPO is scheduled to open on Wednesday.
“With these kinds of issues you will get people who would put fresh allocations into India. Strategic investors like sovereign wealth funds view such issues as opportunities to deploy meaningful chunks of money,” he added.
As many as 18 companies have hit or announced their IPO dates so far this year, with fund-raising from such IPOs totaling Rs25,903.02 crore, data from primary market tracker Prime Database showed.
An additional Rs46,470 crore of IPOs are lined up, data showed. Of the lot lined up, General Insurance Corp. of India, National Stock Exchange of India Ltd and HDFC Standard Life Insurance Co. Ltd are the biggest issuances and are expected to raise around Rs10,000 crore each.
According to Credit Suisse, IPO issuances in FY18 are likely to be 35% higher than the peak seen in fiscal 2008.
Foreign institutional investors (FIIs) have invested a net of $68.87 million or Rs440.7 crore in Indian shares so far this fiscal year, data from National Securities Depository Ltd showed. This is due to huge selling witnessed in August when tensions in the Korean peninsula hurt risk appetite globally.
Meanwhile, domestic institutional investors (DIIs) have pumped in a net of Rs46,185.44 crore in the asset class in the same period, data from BSE showed. These figures include the investments in primary market offerings as well. Also, retail investors have also been actively investing in equity markets directly, but the data for these investments was not available.
The inflows from DIIs have picked up mainly due to more and more retail investors investing in equities through the mutual fund route as interest rates declined, making traditional investment destinations such as bank fixed deposits less lucrative.
According to Credit Suisse, since most IPO issuances are of financials or by way of government divestment, the immediate impact on economic growth will be limited.
“I don’t think the secondary market will be impacted. We tend to believe that the money available for the market is finite, and that is not true. Any good opportunity—a good company with good price is likely to attract strong flows,” said Prithvi Haldea, founder and chairman of Prime Database.
“There is still a lot of money locked in fixed deposits by retail investors. That money could also come in. Mutual funds are flush with inflows, and they are only seen rising,” added Haldea.
According to Haldea, buoyant secondary market sentiment leads to success of these IPOs which in turn provides impetus to the secondary market,
Some were of the opinion that some impact was inevitable, but it was not likely to be huge.
“There is a large supply of IPOs lined up in the coming few months. Given that these IPOs are looking to raise sums of up to Rs15,000-20,000 crore, it will have some impact on liquidity flowing into already listed stocks,” said Jinesh Gopani, head of equities at Axis Mutual Fund
“That is also one reason why we are not seeing a sharp rise in the Indian indices, which continue hover in a range. However, from a domestic mutual fund industry perspective, the impact of new IPOs on allocation decision of fund houses will be limited since there is a reserved portion that an institutional investor can take exposure to,” added Gopani.
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