IPO frenzy can dent secondary market liquidity, cap market upside: Analysts

The US Federal Reserve's taper plans and a brisk economic recovery may also prompt the Reserve Bank of India (RBI) to begin winding up ultra-loose policy regime

After staying away from a handful of initial public offers (IPOs), investors are flocking the primary markets again for listing pop. This primary market frenzy, analysts say, could veer the liquidity wave away from the secondary market, which may cap its upside – at least in the near-term.

“Equity supply in the second half of the current fiscal (H2-FY22) could be around 1.5 times seen in H1-FY22, which could cap the near-term upside, particularly if foreign portfolio investor (FPI) flows were not to substantially pick-up,” wrote Mahesh Nandurkar, managing director at Jefferies in a coauthored report with Abhinav Sinha.

Consider the ongoing IPO of Paras Defence and Space Technologies. The Rs 171-crore issue has been subscribed over 50 times so far, backed firmly by retail investors, who have subscribed nearly 70 times their allotted quota while that of Qualified Institutional Bidders (QIBs) has been subscribed over 4 times.

According to reports, Aditya Birla Sun Life Asset Management (AMC) plans to launch its Rs 3,000 crore IPO over the next couple of weeks. Indian hospitality startup Oyo Hotels and Rooms, too, is expected to file for an IPO next week to raise around $1 billion. That apart, the next big chunk of issuances are likely to be via the government's Rs 1.75 trillion divestment agenda this fiscal, which looks to pare stakes in marquee names such as Bharat Petroleum Corporation Limited (BPCL), Air India and Life Insurance Corporation of India (LIC).

Analysts at Goldman Sachs estimate nearly $400 billion in market capitalisation (market-cap) could be added from new IPOs over the next two-three years. “India’s market cap could increase from $3.5 trillion currently to over $5 trillion by 2024, making it the fifth largest market by capitalization. India’s share of the global market-cap and index weighting should also rise,” wrote analysts at Goldman Sachs led by Timothy Moe, their co-head of Asia macro research and chief Asia-Pacific equity strategist in a recent note.

In the near-term, however, these issuances can pose a threat to the liquidity in the secondary market, which could limit its upside. That apart, rich valuations of the Indian markets, according to analysts, are a concern. The US Federal Reserve’s taper plans of its $120 billion-a-month bond buying program and a brisk economic recovery and aversion of a third Covid-19 wave back home may also prompt the Reserve Bank of India (RBI) to begin winding up ultra-loose policy regime.

“A lot will depend on how the foreign flows play out over the next few months. That apart, IPO pricing will be key. A lot of investors seem to have lost money in the some of the recent listings. If pricing is attractive, investors will flock to the primary markets to make a quick buck,” suggests U R Bhat, co-founder and director, Alphaniti Fintech.

The central bank has already shown its intent when it comes to reining in the liquidity surplus by unexpectedly announcing a seven-day variable rate reverse repo operation. In its August policy statement, the RBI announced staggered increases in the quantum of funds to be taken out through variable rate reverse repos.

Despite the sharp rally seen thus far in the Indian benchmarks prompting overheating concerns, analysts at Goldman Sachs still maintain their 'overweight' stance on Indian equities from a medium-to-long term perspective on expectations of a strong cyclical recovery.

"Investors can find attractive return opportunities, as long as they don’t overpay for growth, as evidenced by significant outperformance of China's new economy stocks over the past decade," Moe wrote.