The Rush To Cash In On India

Sizzling growth and an undervalued market have buyers lining up for IPOs

The five leading investment banks operating in India -- Bombay-based Kotak Mahindra Bank and ICICI Securities, Morgan Stanley (MWD ), Merrill Lynch, (MER ) and HSBC (HBC ) -- received an urgent summons to New Delhi from India's Disinvestment Ministry on Jan. 2.

It was good news. The government wanted the banks to underwrite the sale of 10% of the shares of two wholly state-owned giants: the $8 billion oil explorer Oil & Natural Gas Corp. (ONGC) and monopoly gas transporter Gas Authority of India Ltd. (GAIL). Within 48 hours, the banks divvied up the issues, to be led by Kotak and HSBC, and the next day, the government announced that the auction would take place by March. It is expected to bring $2.5 billion into government coffers, making it India's biggest-ever public offering. The lightning speed at which the process moved astounded the bankers. "It's a breakthrough in the mindset of government. It'll push not just the IPO market, but privatization too," says Uday Kotak, vice-chairman of Kotak Mahindra Bank.

Why the rush? India is hot. Right now, its gross domestic product growth is second only to that of China, and the government, bankers, and investors are keen to cash in on it. To take advantage of India's new visibility, a slew of corporations -- including state-owned companies and outfits in sizzling private sectors such as media and retail -- are planning to divest shares or offer them to the public for the first time. According to Prime Database, a New Delhi company that follows IPOs, almost 600 companies are getting ready to go public this year. Not all of them will make the grade, but the top 25 are expected to raise $5 billion in the first six months of this year, says Prithvi Haldea, managing director of Prime Database. Many of India's best and biggest companies, like software giant Tata Consultancy Services, and domestic air carrier Jet Airways Ltd, are unlisted. For foreign investors, "there's a huge appetite for exposure to this emerging dynamic of the new India, especially as the market is relatively undervalued and the economy is growing fast," says Sanjeev Sanyal, Singapore-based chief economist for Deutsche Bank.

PENT-UP DEMAND. By any measure, India has a lot going for it: a market-friendly government led by Prime Minister Atal Bihari Vajpayee, an economic boom fed by Bangalore's computer-software companies and by the mushrooming of outsourcing centers across the country, and a stock market that gained nearly 85% in 2003. At a forward price-earnings ratio of 17, Bombay's index is still relatively undervalued compared with Standard & Poor's p-e of 20. Moreover, proponents note that Indian companies' return on equity to investors is 24%, compared with 12% for China. India's cheerleaders in the investment community say the sky's the limit. But will investors, both local and foreign, still find value as more and more issues crowd the market?

What's clear is that -- for now -- there's a lot of pent-up demand. Last year, the Indian market had only 15 new listings, which raised a mere $450 million. They were oversubscribed 17 times on average. The question is whether IPOs for private companies such as department-store chain Shoppers' Stop -- and for state-run giants in line for partial privatization -- will be priced low enough to warrant star treatment from stock buyers. The party could end fast if anything goes wrong. The last major market boom, from 1993 to 1996, ended amid scams and recriminations as dozens of low-quality companies with nonexistent earnings and assets were bought up in the investing frenzy only to later go bankrupt.

Officials insist, however, that things have changed. The national regulator, the Securities & Exchange Board of India (SEBI), they note, is newly invigorated with greater punitive powers and has been coming down on market offenders. Last August, for example, it banned a top fund manager of Alliance Capital, a New York-based mutual fund provider with a large presence in India, for alleged insider trading. SEBI has also increased transparency by requiring consolidated accounting and the disclosure of related-party transactions.

In addition, India's markets have installed new technology that makes them both more efficient and more transparent. Most trades on the Bombay exchange are settled in just two days, compared with a month just five years ago.

Such reforms have helped to bring retail investors back into the market. Last July, when the government divested its 26% stake in auto maker Maruti, 350,000 retail investors applied to buy the stock. By December, when state-owned UCO Bank went public, a million investors applied to buy shares. Foreign investors are also back -- and in greater numbers than ever. They now own about 40% of the floating stock of listed Indian companies, double their share a year ago. In 2003, foreign institutional investors pumped a record $6.4 billion into the market, and analysts expect a similar amount to pour in this year. Sukumar Rajah, chief investment officer for Franklin Templeton Investments, which manages 40 funds in India, predicts that the upcoming IPOs will help to increase India's weight in the international investment indices, making it "a more important destination for investment."

HANDSOME PROFITS. Some of the most attractive IPOs will be in fast-growth industries like technology, telecom, media, and pharmaceuticals, where India has firmly established itself as a competitive player. Tata Consultancy Services -- Asia's largest tech-services provider, with annual revenues of $1.3 billion -- and back-office outsourcing specialist Datamatics both plan share offerings this year. Not all the offerings are from purely local companies: Hutchison Essar, India's largest mobile-phone operator, which is majority-owned by Hong Kong's Hutchison Whampoa Ltd., is expected to issue shares this year. So is movie and television-show producer UTV, in which media baron Rupert Murdoch has a 30% stake. Many of these listings will allow private equity holders to exit with handsome profits -- something that should lure more venture capital to India's fertile business terrain.

The biggest spotlight this year will be trained on state-owned companies anxious to offer shares to the public for the first time. Both ONGC and GAIL are already listed companies, but only other government companies own their shares. Now, those cross-holdings are being sold to all comers.

Plenty could go wrong. Investors may shun heavy infrastructure plays and even desert promising tech companies at the first whiff of newly hatched stock scams, political gridlock, or an economic slowdown. Indeed, there are still many fund managers who regard India as forbidden territory. "I don't buy that India is the next big thing," says Edmund Harriss, who manages about $160 million in two Asian funds for Guinness Atkinson Asset Management LLC. "The obstacles to success are enormous," Harriss says, citing state interference in corporate affairs and "endemic corruption."

Given the surge of new foreign investment, others clearly disagree. And if this year's bumper crop of IPOs generates great fanfare, as expected, the investment bankers will be eagerly standing by their phones ready to answer the government's next call.

By Manjeet Kripalani in Bombay

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