India's IPOs to Spice up Remainder of '06

Includes: IFN, IIF
by: Steven Towns

In today's Wall Street Journal Asia print edition, Rasul Bailay reports that India's stock market seems poised to finish 2006 on a high note in HEARD IN ASIA: India's IPO Market Sees Revival As New Issues Restore Optimism.

India was one of many emerging markets to suffer a broad selloff in May. The Sensex closed at a record high on May 10th of 12,612.40 that was followed by a bottom of 8,929.44 on June 14th and as of Friday's close stood at 11,465.72 or 28% above its post-May low but still 9% off its peak.

The success of two recent IPOs: Tech Mahindra, a software company, and GMR Infrastructure, an infrastructure developer are being regarded as an all-clear signal as analysts believe investor confidence is back and more firms will be eyeing an equity offering to capitalize on the optimism.

Prithvi Haldea, managing director of New Delhi-based Prime Database which tracks India's equity offerings is quoted throughout the article saying such things as:

"I think the worst is over. / If the present trend in the secondary market continues for a month, we'll see more and more IPOs. / Foreign institutional investors are coming back. / The correction has brought some sanity in the market. Reasonable pricing [of IPOs] is good for the market as well as the investors."

The last two remarks are related to his statement that, "Historically, the primary market has been led by some strong companies willing to take a hit on their [IPO] prices." And this is what he suggests Tech Mahindra did with its IPO which was 72x oversubscribed.

Comment: Nilesh Shetty, head of research at Pranav Securities calls the May crash a "wake-up call." In my opinion it has essentially resulted in a win-win situation for listing firms (and their underwriters) and investors. If you are looking for a way to invest in India consider reviewing the Morgan Stanley India Investment Fund (NYSE:IIF) and The India Fund (NYSE:IFN).

I wonder however, what a rush of IPOs might mean for the shares of those firms already listed. For instance, I'm aware that in China there's been a tendency among investors to pull money out of their stock investments in order to participate in IPOs, which puts downward pressure on shares of already listed firms (see related post here). Although the argument in the China case is that the improving quality of IPOs leads to more market participants and thus brings more money to the market.

At any rate the WSJ article mentions new issues slowed to a trickle in June and July but tracking company Prime Database estimates that there could be more than 200 billion rupees of stock sales through the rest of the fiscal year ending next March -- likely exceeding the 237 billion rupees (~$5 billion) raised last fiscal year.

Among possible new listings, Prime mentions DLF, a New Delhi-based real estate company, state-owned Power Finance, Multi Commodity Exchange of India and Parsvnath Developers, a real-estate firm.

Also see The Prudent Investor in Investing in India: A First Hand Account From the Sub-Continent, An excerpted analysis by two Morgan Stanley economists in Is Indian Growth Acceleration Sustainable?, and Travis Johnson in Lightening Up on the India Fund.