India's stock market rally seems to have run out of steam, if results of recent initial public stock offerings are any indication. A spate of companies rushing to raise capital in recent weeks has resulted in big names trading below listing prices and some follow-on offerings struggling to find enough investors.
The disappointing results follow a strong rebound by the market since May, after a decisive general-election victory by India's Congress Party boosted investors' hopes that the ruling coalition government would have the votes to push through key financial sector reforms and privatization. From May through Sept. 9, the Bombay Stock Exchange's benchmark Sensex index rose 42%, bouncing back from a 52% decline in 2008. As stocks revived, so did India's moribund IPO market. Since May, eight companies have raised about $2.5 billion in initial offerings; there was just one IPO in the first five months of 2009, according to Indian capital-markets tracker Prime Database.
But with big-ticket IPOs like those of Adani Power and National Hydro Electric Power Corp. falling below their launch prices last week, and smaller entrants like Excel Infoways and Mahindra Holidays and Resorts continuing to trade below listing prices, retail investors are turning wary. The latest IPO, that of state-run Oil India which closed Sept. 10, saw a relatively muted retail response, say investment bankers, with most of the interest coming from institutional buyers. "We've invested very selectively in the companies that have come to markets post elections," says Sukumar Rajah, chief investment officer at Franklin Templeton Mutual Fund. "There wasn't much to attract us, particularly from a long-term returns perspective."
The tepid performance stems in part from the quality of companies coming to market. Several listings have come from the cash-strapped real estate and infrastructure sectors, and were perceived as overpriced. Says a Mumbai investment banker: "The market has run ahead of itself, and fundamentals aren't supporting present valuations."
Still, there may be plenty of paper flooding the markets in the next couple of months. The Securities and Exchange Board of India has approved IPOs for 13 companies while another 22 have filed for approval, according to Prime Database. But that flow may slow as market sentiment sours. "Investors have been disappointed by the after-market performance of some big names," says the Mumbai investment banker, who asked not to be identified because his firm is involved in some of the issues. "It's not as easy to get a listing done now, it is taking a lot more marketing and investors want to be absolutely sure of the quality of the company as opposed to the appeal of a sector. But liquidity is not an issue and we will continue to see aggressive fund raising."
A good part of this liquidity is coming from foreign institutional investors that are keen to diversify into a fast-growing economy that still has relatively few big listed companies. With a healthy GDP growth rate of 6.7% in the last fiscal year, India remains an attractive destination for investment capital that was sidelined by the recession. Bankers are hoping the market will get a boost later this year from the anticipated IPOs of companies such as cable-TV service provider Digital Entertainment Network, which has exposure to increasingly wealthy Indian consumers. "We're waiting for consumption-oriented companies to list," says the Mumbai banker, "because they will be a better play on the India growth story than the companies we've seen so far, which came in mainly because they were cash-strapped."