IPO frenzy may suck up liquidity, cap secondary market upside: Analysts

After ignoring a handful of initial public offerings (IPOS), investors are flocking to the primary markets again. This frenzy, analysts say, could steer liquidity away from the secondary market and cap its upside — at least in the near term.

“Equity supply in the second half of the current fiscal (H2FY22) could be around 1.5 times seen in H1, which could cap the nearterm upside, particularly if foreign portfolio investor (FPI) flows were not to substantially pick up,” wrote Mahesh Nandurkar, managing director at Jefferies, in a report co-authored with Abhinav Sinha.

For instance, consider the IPO of Paras Defence and Space Technologies. The ~171-crore issue that closed on Thursday was subscribed 318 times and generated bids worth ~38,021 crore.

According to reports, Aditya Birla Sun Life Asset Management Company (AMC) plans to launch its ~3,000-crore IPO over the next couple of weeks. Indian hospitality start-up 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 is likely to be via the government’s ~1.75-trillion divestment agenda this fiscal, which includes the sale of stake in firms like Bharat Petroleum Corporation (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 capitalisation. India’s share of the global market cap and index weighting should also rise,” analysts at Goldman Sachs led by Timothy Moe, their co-head of Asia macro research and chief Asiapacific equity strategist, said 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 plans to taper its bond buying programme, a brisk economic recovery, and a third Covid-19 wave back home may prompt the Reserve Bank of India (RBI) to begin winding up its 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, cofounder and director, Alphaniti Fintech.

Despite the sharp rally prompting concerns of overheating, analysts at Goldman Sachs 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,” said Moe.

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