India IPO Returns Beat U.S. as Funds Chase High-Growth Companies

  • Forty-seven IPOs raise $1.5b this year, twice the sum in 2015
  • Companies tapping growing assets with funds amid market rally

Amid India’s bull market celebration, it’s the newcomers that are having the biggest parties.

The 47 IPOs priced this year have returned an average 41 percent, more than four times the climb in the benchmark S&P BSE Sensex, data compiled by Bloomberg show. The gain is double the 19 percent mean for U.S. deals, and ahead of the 9 percent offered by first-time sales in Europe, the figures show.

Microfinance providers, a city-gas supplier, a staffing firm and a diagnostics chain are among companies that have raised $1.5 billion since Jan. 1, more than twice the amount from a year earlier. That’s happened as a buoyant stock market prompted private equity investors including Sequoia Capital to exit from some of these investments. New sales may reach a record in the year to March, the regulator forecasts, as investors chase companies riding the services boom in the world’s fastest-growing major economy.

“India has changed and a changing country needs new services and there’s demand for them,” Sadanand Shetty, a senior fund manager at Taurus Asset Management Co., which oversees $476 million, said by phone from Mumbai. “Most of the IPOs are from new high-growth sectors. Their valuations are not cheap but investors are paying a premium.”

Companies are tapping a growing pool of capital as institutional investors pour money into stocks, driven by the 25 percent gain in the Sensex since Prime Minister Narendra Modi took office in May 2014. Equity funds took in a net 740 billion rupees ($11 billion) in the year ended March, up 4 percent from a year earlier. Investor accounts reached 48.9 million in June, up from 47.6 million in March, data from an industry body show.

PE Exits

India’s isn’t the only country seeing a pick up in first-time sales. With U.S. equities at records, investors are betting on IPOs again after a slow start to the year. Japan’s Line Corp. raised more than $1 billion in 2016’s biggest technology IPO this month. In China, the waiting list for new issue approvals exceeds 800, according to the China Securities Regulatory Commission’s website.

The difference this time in India is that the first six months have seen private equity investors sell stakes worth 30 billion rupees through IPOs. That’s higher than the 23.4 billion rupees of positions they cashed out of in 2015, according to New Delhi-based Prime Database. The outperformance from first-time sales is the most since calendar 2014, when the S&P BSE IPO Index surged 82 percent after Modi’s election win, beating the 30 percent annual gain in the Sensex.

Strong Demand

Quess Corp., a technology staffing firm, began trading July 12 at a 56 percent premium. Shares in India’s biggest IPO of the year were valued at 45 times fiscal 2016 earnings. Yet, the portion kept for wealthy individuals was oversubscribed 397 times, while large investors bid for 61 times the quantity.

Mahanagar Gas Ltd., a supplier to homes and cabs in Mumbai, generated a 28 percent pop for investors on its July 1 debut. Equitas Holdings Ltd., in which Franklin Templeton India has a 8.5 percent stake, has surged 78 percent since its April debut. The shares trade at 32 times forward profits. Advanced Enzyme Technologies Ltd. rose as much as 39 percent over offer price on its first trading day Aug. 1. The IPO got 116 times demand last month.

To be sure, large subscriptions have not always lead to a big-bang listing.

Under Water

L&T Infotech Ltd., a unit of the largest engineering company, saw its shares drop below offer price on their July 21 debut. Precision Camshafts Ltd., Quick Heal Technologies Ltd. and HealthCare Global Enterprises Ltd. are all trading below their sale prices.

Some investors such as Aberdeen Asset Management Plc prefer companies with a longer financial and trading history over new issues.

“There are enough opportunities in the listed universe where we can sieve for companies with a record of operating through cycles and fair treatment of minority shareholders,” said Kristy Fong, a Singapore-based assistant investment manager at Aberdeen Asset.

That said, companies including ICICI Prudential Life Insurance Co. are preparing to go public. Eighteen IPOs seeking 61 billion rupees have been approved by the regulator, according to Prime. The pipeline also includes a clutch of small and medium-sized firms that are too small to list on the main board, according to the National Stock Exchange.

“We have been engaged with these companies for the past four to five years,” Chitra Ramkrishna, chief executive officer of the NSE, said in an interview in Mumbai. “Some of them have started to explore. We expect some action with growth picking up.”

While strong appetite has diminished the odds of getting an IPO allocation, the prospects of outsized profits are proving hard to pass up, said Gautam Sinha Roy, a fund manager at Motilal Oswal Asset Management Co. in Mumbai.

“A number of companies coming up are in the emerging sectors; they are ripe for the picking,” he said.

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