A harmonic convergence of near double-digit economic growth, a roaring bull market, and expansion-minded executives has set the stage for another year of high-volume initial public offering activity in India. And this year could be a record-buster, according to market watchers.
One reason is the Bombay Stock Exchange's benchmark Sensex Index, which delivered a nearly 50% return last year and is up about 2.2% so far in 2007. In all, some 150 companies will list this year and raise an estimated $10 billion, according to Delhi-based Prime Database, which tracks IPO activity. "This will be the highest-ever amount in a year," says Prithvi Haldea, Prime's managing director. Encouraged by the general investor enthusiasm for new issues—not to mention an economy expected to hit a growth rate of almost 10% in 2007—more than 30 companies have already filed or received approval from the Securities and Exchange Board of India to raise $6.3 billion.
Last year's IPO activity, even with a market crash in the Sensex in late spring, was extremely robust despite worries by some that the Indian stock rally had run its course. Yet when stock prices resumed their march upward later in the year, "investors began to view the pessimists with skepticism" and again started snapping up shares of newly listed companies, says Sanjay Sinha, head of equity at State Bank of India Mutual Fund.
Not Without Risk
About 80 companies raised $5.4 billion in 2006. And some investors were rewarded handsomely, particularly with companies in high-growth sectors. Energy transportation concern Gujarat State Petronet, which operates the second-largest pipeline in India, raised $84 million in its IPO last February and shares jumped 75% during its first day of trading. It currently trades at 51.25 rupees ($1.16), more than double its trading levels last June.
IT Service firm Tech Mahindra—majority-owned by Mahindra & Mahindra, one of India's biggest commercial groups—was another winner. It's one of the country's biggest exporters of software and recently bought iPolicy Networks, the Indian unit of the U.S. network security provider iPolicy. Its shares have more than doubled to 743 rupees ($16.84) since its IPO last August.
Even so, investing in India IPOs overall has been a risky affair. About 50% of the Class of 2006 initial offerings are today trading at break-even or below their listed price. One of the real disappointments last year was Jet Airways, India's biggest domestic airliner. It launched trading one year ago just as oil prices started their ascent to record levels by mid-year and budget carriers started to pressure margins. Jet's share price is off 30% to 763.95 rupees ($17.32) from its initial trading price back in February, 2005. No-frills carrier Air Deccan, which also debuted last year, has fared better and now trades at $3.40 per share vs. a listing price of $2.20.
Venture Capital Interest
This year's incoming group of aspiring companies is likely to be more broad-based and involve more established companies in real estate, banking, telecom, IT, media, and retail, as well as a few public-sector spin-offs such as Power Finance Corporation and Power Grid Corporation. "What's heartening is the fact that most of the sectors accessing the market have delivered profits in the past," says Narayan, managing director of Kotak Securities.
Part of the IPO bonanza will be driven by venture capital and private equity firms exiting from earlier startup investments. Some 15 such firms will be selling off equity stakes for cash, according to the trade group Venture Intelligence.
With India desperately struggling to rev up its infrastructure, from roads to power to ports, a host of real estate and infrastructure companies will enter the market. The largest IPO this year will probably be New Delhi-based real estate company DLF, which is benefiting from India's booming commercial and residential construction market. Last August, the company shelved an IPO to raise about $2.5 billion to pay debt and fund construction after minority investors complained. A smaller offering is expected this year in the $2 billion range.
Even India exchanges are expected to jump into the act in 2007. The Bombay Stock Exchange hopes to raise $222 million, while the Multi Commodity Exchange of India will come forward with a $66 million issue. The State Bank of India is expected to sell $447 million worth of bonds during the first quarter of 2007, and has said it may sell shares later in the year.
Also in queue are a range of brokerage firms focused on the retail side. Individual brokerage accounts only represent 3% of India's total $300 billion retail market, and is expected to grow to 10% by 2010, according to Delhi-based retail consultancy Technopak Advisors. The media sector is expected to see 18 offerings that are expected to raise about $666 million.
Wireless telecom will be interesting, too. Take Idea Cellular. This Indian wireless operator, a unit of the Aditya Birla Group, is investing heavily to expand its network and compete with Hutchison Telecommunications International in India. It hopes to raise about $450 million in an IPO expected around March.
How will this fresh crop of IPOs fare in India? It always depends on the sector, but one thing is certain. Despite the high overall valuations right now among Indian stocks, companies will have to price their listings conservatively, given the mixed performance of last year's newly listed companies. "This time there will be more sobriety in the initial price trading ranges of new stocks, leaving more upside potential for investors," says Sinha of State Bank. In any event, get ready for the party to begin.
Click here for a slide show of some of the Indian companies planning IPOs in 2007.