One bright spot

India’s equity markets are emerging as a bright spot in a challenging Asian landscape, as investors look to diversify away from China and more companies seek growth capital.

In a difficult year for Asian equity financing, India’s IPO market stands out as the one bright spot.

Overall Indian ECM volumes have fallen to US$7.16bn at the end of the third quarter compared with US$18.5bn for the same period of 2015, according to Thomson Reuters data.

Fewer government stake sales and a slowdown in follow-on capital raisings through qualified institutional placements have weighed on deal flow, leaving this year’s total some way off the forecast of US$15bn–$20 bankers had made at the start of the year. Although the last quarter is expected to be active in terms of IPOs and secondary share sales, the original target will be missed by a distance, bankers said.

The IPO market, however, has fared very well. According to law firm Baker & Mckenzie, 50 companies have raised US$2.93bn so far this year, beating last year’s total of US$2.8bn from 71 listings.

Another 22 listings in the pipeline for the end of 2016 are expected to lift the 2016 total deal value to US$5.8bn, more than double last year’s total and the highest annual tally since 2011.

The benchmark Sensex index is among the best performing markets in Asia having risen 7.6% year to date and this has prompted shareholders to exit through IPOs on the confidence that they will get high valuations for the shares. Sales from both private equity owners and individual controlling shareholders have added to IPO activity, while investors have welcomed the deals.

“The flurry of IPO activity is likely to continue for the rest of 2016 and well into 2017, driven by upbeat economic sentiment, improved business confidence, easing inflationary pressure and stable foreign direct investment inflows.”

“IPOs are favoured by investors as they can play a role in setting the price unlike in the secondary market,” said Pranjal Srivastava, head of equity capital markets at ICICI Securities, which has managed 11 IPOs this year.

According to Srivastava, domestic mutual funds are looking to put more money to work as a result of strong inflows from retail investors.

This enthusiasm for new stocks has led to a broader range of IPOs this year than in 2011. Srivastava notes that many issuers are from asset-light sectors such as healthcare and banking, while in 2011 equity financing came mainly from more capital-intensive sectors such as real estate and infrastructure.

The IPOs have offered investors exposures into sectors for the first time. These include the first IPO from the country’s life insurance sector, for ICICI Prudential, while other rare issues have featured Pepsi bottling franchisee Varun Beverages, natural gas distributor Mahanagar Gas and mortgage company PNB Housing Finance.

The outlook for IPO continues to be strong for next year. Around 16 companies are in the pipeline to be listed domestically in 2017, raising as much as US$5.86bn, Baker & Mckenzie said. These IPOs include Vodafone’s highly anticipated US$3bn IPO, which could potentially surpass the 2010 listing of state-run Coal India to become India’s biggest IPO.

“The flurry of IPO activity is likely to continue for the rest of 2016 and well into 2017, driven by upbeat economic sentiment, improved business confidence, easing inflationary pressure and stable foreign direct investment inflows,” said Ashok Lalwani, head of the international capital markets group and global India practice at Baker & Mckenzie.

“Private equity funds which were unable to exit after the global financial crisis in 2008 are finding potential windows and attractive valuations.”

Other potential IPOs from the private sector include that of SBI Life Insurance, Bombay Stock Exchange, National Stock Exchange, Central Depositary Services, DM Aster and Go Airways.

State support

The government, which has an extensive plan to monetise its holdings in public sector businesses, is also looking to ride the IPO boom, and has hired banks for the respective Rs15bn and Rs12bn IPOs of Housing and Urban Development Company and Cochin Shipyard. Ministers have also revived plans to list aircraft maker Hindustan Aeronautics through a Rs30bn IPO.

An IPO from a state-owned enterprise would be the first since National Building’s Rs1.3bn listing in 2012.

ICICI Securities, IDBI Capital, Nomura and SBI Capital are working on the HUDCO IPO while Edelweiss, JM Financial and SBI Capital are the bookrunners for Cochin Shipyard, which plans to file a draft prospectus in November.

Bankers are optimistic that the business trust market may finally open next year after regulators clarified rules for the infrastructure investment trust (Invit) and real estate investment trust model. So far this year five companies have taken various steps towards Invit IPOs totalling US$1bn–$1.5bn. These are IL&FS Infrastructure Investment Trust, IRB InvIT Fund, MEP Infrastructure, GMR Infrastructure and Sterlite Grid. Blackstone Embassy is likely to be the first REIT offering, although the timing is not yet clear.

While domestic listings remain in hot demand, Indian companies seem in no rush to seek a foothold in the global markets, given the high cost of listing and reluctant investor engagement. The poor listing of the Azure Power Global IPO on the NYSE in October has further weakened the case for global listings, after the renewable power producer cut the deal to US$61.2m and the stock tumbled 19% on its debut.

Still, technology companies are likely to be knocking at the doors of overseas stock exchanges in search of specialist investors.

Strand Life Sciences is planning a listing on the Nasdaq while locally quoted outsourcing giant HCL Technologies is also planning a US listing.

“Improved business confidence is also driving Indian companies to look at growth and market expansion opportunities overseas by way of cross-border IPOs,” said Lalwani. “This provides a means to access risk capital that is not available in India, and also to connect with investors who better understand and appreciate their businesses.”

Following through

While there seems to be no stopping the IPO party, bankers have not yet completely given up hope of follow-on offerings and major secondary placements.

Companies are expected to ramp up capital expenditure to take advantage of the various economic reform initiatives taken by the Narendra Modi government.

The government has also brought forward the federal budget announcement to January next year from the usual February, adding to hopes that tax breaks or targeted measures to boost the economy may trigger share offerings as companies fund their expansion.

“We can expect some budget-related stimulus for the equity capital market in first quarter,” Srivastava said.

Qualified institutional placements got off to a slow start in 2016 and suffered a further setback after Yes Bank pulled a high-profile US$1bn follow-on after drawing weaker-than-expected demand from investors. Still, bankers remain hopeful that the QIP format will make a comeback early next year.

The government, which has preferred to monetise stakes in state-owned companies through share buybacks, is also expected to resume selling shares to the public next year.

“With buybacks pushing up share prices, the government can now sell its stakes in the market without offering a sharp discount,” an ECM banker said.

With stock prices looking stable and the fiscal year-end looming on March 31, the much delayed state sell-downs in Coal India, Oil India, National Aluminium and NMDC are expected to take place early next year.