Asia's new bubble: Finding value in India's IPO boom

The volatility in India’s markets triggered by Prime Minister Narendra Modi’s surprisingly narrow victory in the country’s 2024 general election may have seen a short-term cooling effect on investor sentiment. But it probably does little to dent the general excitement around initial public offerings (IPOs) that has been fuelling the investing frenzy in Mumbai.

The value of India’s initial offerings has more than doubled this year through June 11 from the same period in 2023, despite a decline of nearly 60 per cent in the Asia Pacific region overall1. The country now accounts for about a quarter of Asian IPO proceeds, while Hong Kong, previously among the top listing destinations globally, is experiencing a drought in deals with investment banks cutting jobs. And although concerns around the formation of a new government may see some Indian issuers reduce their IPO valuations, optimism about economic growth and caution over China’s slowdown are turning the tables fast.

Eight of Asia’s 20 most dramatic trading debuts this year have been in India. Stocks that went public in the country from January to mid-June popped by an average of 61 per cent in their first day of trading. Zealous retail investors are using margin loans to maximise their chances of an allotment. As a result, the retail portion of many IPOs is oversubscribed by more than 100 times. In the case of HOAC Foods, a maker of flour and spices, individual investors placed orders for more than 2,000 times the shares available, setting a record for the country. 

But the frenzy is not limited to retail investors. In some recent deals, the institutional tranche was also oversubscribed by more than 100 times.

The exuberant demand has led issuers and underwriters to price shares aggressively, leaving less for long-term investors. In response, India’s stock market regulator has taken measures to curb margin lending and prevent price manipulation over the last few months. We think the regulatory intervention is timely and conducive to the market’s sustainable development.

Because while a new bubble is forming in India’s equity capital market, there are companies worthy of attention beneath the frothy surface.

A toolkit for value

Our approach to analysing an issuer involves looking at its long-term growth potential, quality of management, and valuation relative to listed peers. 

We examine a company’s financial records and compare them with those of its listed peers, if possible. This helps us to determine whether the company’s pre-IPO growth is sustainable and whether its financial numbers have been inflated. (It’s not uncommon for issuers to window-dress their numbers to ensure successful listings.)

Fidelity’s research often starts early, thanks to IPO intel compiled by our equity capital markets team, as well as on-the-ground efforts by our analysts in India.

We typically meet with a company’s executives two to three times before deciding whether to buy its new shares. Talking to management directly can help fill in the gaps for a non-listed firm without much of a track record. And we may speak with an issuer’s competitors, customers, private equity investors, or industry regulators for a better understanding of its business from more perspectives.

In addition, we closely analyse the IPO’s structure. A high proportion of new shares would mean the company raises more money to fund its growth, while a sale dominated by old shares from existing investors is less desirable. When private equity investors sell a small part of their holdings, it can also create an overhang of selling pressure after the IPO. 

We think the current market in India is hot but not yet absurd, with scope for finding good companies at reasonable prices. Small caps are looking more speculative due to the influence of retail investors in a segment where institutional participation is relatively low, but companies with market values above USD $1bn are worth serious research.

There is a strong mix of businesses in India’s IPO pipeline, with some well positioned to benefit from the country’s macro tailwinds. For example, one general insurer has been expanding its premium income at an annual compound rate of about 50 per cent over the last few years. Another company, which provides digital services to India’s booming life science sector, has enjoyed annualised revenue growth of about 30 per cent and a return on equity above 20 per cent. 

The party doesn’t stop here

India has seen the highest number of IPOs among Asian countries this year. More and bigger offerings are expected on Indian stock exchanges over the next 12 months, including several billion-dollar deals.2 Candidates include ecommerce firms, traditional retailers, infrastructure companies, and electric vehicle makers. Some global conglomerates - such as one Korean auto giant we know of - are planning to list their India units, taking advantage of rich valuations which could help unlock value.

Besides India’s robust economy, ample liquidity has been a driver of the country’s IPO boom. The Reserve Bank of India is forecast to start cutting interest rates in the second half of 2024, as domestic inflationary pressures ease and the US Federal Reserve is expected to pivot. So, with growth healthy and credit loose, the current IPO bubble could hold out a while longer.  

1: According to data compiled by Bloomberg
2: Pacheco F., Joshi A. (2024, May 21). Big IPOs Seen Making a Comeback in India as Stock Boom Continues. Bloomberg.