Indian IPO Market
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Indian IPO Market : Poised for a Big Leap!
If 2009 was the year of capital erosion, 2010 could well be the year of capital raising! Thanks to the recovering capex cycle and surging domestic expansion activities, the year is all set to witness a frenzy of capital raising activities via IPO, right issues and overseas issues.
The collapse of Lehman Brothers has led to the rechristening of the financial events as `Before Lehman Brothers' and `After Lehman Brothers'. The spiralling events in the last two years have uprooted the conventional wisdom and, in many cases, forced the entities to go back to the basics. Banks have gone back to deposit and lending business, investors have gone back to long-term investments, (re)understanding the risk-reward relationship (high yield = high risk), and in most cases, nations have become `police states'. As developed economies started getting into recessionary trends, overseas investment in emerging markets flew back to its original source. For example, Indian equity market witnessed net sales of $12 bn in 2008. As the demand for investment ideas started drying up, the primary market—IPO market—in India became much quieter. To stretch Schumpeter's idea of `innovator' to `break the cycle'—the government's stimulus package did just that. Globally billions of dollars were pumped into the economies to encourage spending and the investing attitude of public. A cursory look at the Indian IPO market over the last two years shows that economic fundamentals continue to dominate the financial markets. Domestic demand, consumption, savings, and investment are the main currents flowing under the glamorous facade of financial markets.
During 2008 (see Table 1), India Inc. raised Rs 185,526.3 mn ($~4bn) through IPOs. This amount is negligible, compared to almost $30 bn mopped up through IPOs in the US during the same period. Even during the turbulent times, Visa Inc. managed to launch a massive IPO of $17.9 bn. In 2008, a majority of the Indian IPOs were concentrated in the energy sector. The crude oil prices were hitting a new high everyday, so also the commodity prices. Reliance Power managed to make a debut just before global meltdown in January 2008. As the year 2008 progressed, the US continued to record negative GDP growth. The UK government forecast a worst recession in decades, and capital flight from emerging economies gained momentum. Domestically, in the backdrop of falling exports and employment, growth in industrial production (IIP) reached its nadir (see Chart).
During 2008, 35 IPOs were canceled and/or postponed (see Table 2). A majority of these IPOs belonged to engineering, financial and IT-related sectors. The first axe of global recession fell on these sectors, as companies decided to go slow on new capex and expenditure. A sharp fall in domestic manufacturing was also evident from the fact that as global demand—especially from developed markets—slowed down, domestic companies put a cap on capex. 
Despite the stimulus packages announced globally, including by India, year 2008 remains one of the worst years for financial markets. The volatility continued for the Indian market because of the general elections in May 2009. The possibility of a hung Parliament kept investors at bay and away from the Indian capital market. The domestic consumption took a hit, as fears of unemployment widened. During 2009, 42 IPOs were canceled and/or postponed. A majority of those belonged to the real estate sector. The demand for new and existing housing in tier 2-3 cities had started waning and companies were trying to tap the primary market to fund the existing and new projects. Low domestic consumption also badly hit the FMCG sector, where some IPOs were canceled and/or postponed. Interestingly, many companies involved in gems and jewelry business tried to tap the capital market, but in vain.
Signs of revival
A historic win by the UPA government ensured the possibility of a stable government for the next five years. Meanwhile, the government stimulus package started working like a panacea. Globally and domestically, demand started picking up gradually, especially in the second half of 2009. A major push in the IPO market was witnessed during this period. The theory of decoupling became more evident, as the Indian and Chinese economies continued to show a stronger growth rate, though lower than the previous year. During 2009, 17 IPOs worth Rs 151,568 mn were launched. Though engineering and energy sectors continued to dominate the IPO market (in terms of value), new economy sectors such as media, hotels and IT also showed their presence. Companies involved in shipping and oil and gas exploration also tapped the primary market to mop up funds for expansion. The growth in India's exports was the sharpest in late 2008; over a long period of more than 12 months, exports growth turned positive in November 2009. The growth recovery in industrial production was well-rounded, as mining and electricity also contributed positively towards the overall growth. 
Global liquidity is very comfortable; in fact, it is a debatable whether to call it liquidity or savings glut. Indian equity market has witnessed a net inflow of ~$11 bn of overseas funds. The prospects of the emerging economies, including India, remain brighter. In fact, investing in the BRIC economies has become the `call of the decade'. Year 2010 is likely to witness a flush of IPOs in the Indian market. However, it is important to remember and practice the lessons from the last two years. Going back to the basics, due diligence remains the main priority for the investors.
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