IPO and FPO issues could reach 4-5% of India market cap, says Jefferies; lists 3 main reasons

Jefferies believes initial public offering (IPO) and follow-on public offering (FPO) issuance could reach 4 to 5 percent of market capitalization, in line with China's figures. Robust demand for equities driven by increasing domestic investors is creating conditions for increased activity in the primary market, it said, adding that pre-IPO activity was also driven by sale of promoter shares, government disinvestments, listing of large Unicorns and continued PE pushed forward will be stirred up like in 2023.

The brokerage firm said India's primary market activity, i.e. IPO and FPO issuances, averaged about 0.8 to 1.2 percent of market capitalization over the last decade. In contrast, the Chinese market experienced a surge in large listings between 2010 and 2015, issuing around 4.5 percent of their market capitalization during this period. The brokerage sees a similar story in India.

The brokerage firm lists the key reasons behind this prediction. Let's take a look:

Promoter/PE sales can further improve market liquidity and float

According to Jefferies, promoters and private equity (PE) firms together hold 50 per cent stakes in BSE500 companies, indicating a steady stream of exits at an annual rate of 0.7 per cent of India's market capitalization, reflecting an extensive delivery pipeline is. Last year, 74 percent of share issues were share sales by project sponsors and/or major investors.

Jefferies' analysis of 100 such block transactions in 2023 shows an almost equal split between exits from PE firms (51 percent) and promoters (49 percent). These exits include cases where PEs were major shareholders and also PE exits from recently listed Internet companies. Despite numerous promoter and PE exits, Indian markets showed resilience and instilled confidence among PE/VC investors about exit opportunities in India, it said. This confidence is expected to boost fundraising activity among PE/VC investors and support the growth of bigger and better unicorns in India, the brokerage firm added.

An opportune time for global MNC companies to go public in India

Jefferies also said the timing appears right for global multinationals to consider listing in India. For example, Hyundai India, founded nearly three decades ago, recently announced its listing plans in India, potentially paving the way for numerous other multinational companies with significant market shares in India that are yet to list in the Indian market, it said.

The brokerage firm also pointed out that some of the global multinational companies listed in India have seen much faster growth in market capitalization than their global listed companies due to higher sustainable multiples that these companies enjoy in India and which are not available in their home countries be. Recently, BAT (stake in ITC), Whirlpool and Hyundai announced monetization of their stakes in Indian companies. These examples could lead to more MNC companies operating in India listing/monetizing their Indian assets. According to Jefferies, if larger global companies like Amazon, Samsung, Apple, Toyota etc. thought along these lines, it could be a game-changer for the Indian stock markets.

It was also noted that multinational companies have started using the Indian market as a source of financing. For example. Recently, Hyundai India expressed interest in going public in India to raise $3 billion. This would be India's largest IPO with a valuation of up to $30 billion, more than half of Seoul's $42 billion market capitalization. Similarly, Whirlpool Group announced plans to sell up to 24 percent stake in its Indian arm, with the proceeds to be used to pay down debt of the global unit, it added.

IPOs of large start-up bases can open up attractive investor opportunities

The brokerage firm also noted that the Indian internet economy has spawned over 100 unicorns in the last decade, positioning itself as the third largest unicorn hub globally, behind only the US and China. These unicorns cover various sectors including SAAS, e-commerce, fintech, gaming, edtech, D2C, logistics, mobility, web3 and healthtech. In total, they have amassed over $100 billion in funding and have a total value of over $350 billion, it said.

Jefferies also highlighted that India's unicorn growth rate significantly exceeds that of other nations, with a five-fold increase in unicorn numbers between CY18-22, compared to two-three times growth in China and the US. The proliferation of these large unicorns suggests significant stock market potential over the next five to seven years, the brokerage firm said.

Notable examples of successfully listed startups in India include Zomato, Nykaa, PBFintech, EaseMyTrip, InfoEdge and Honasa Consumers, while others such as Flipkart, Swiggy, Ola Electric and PhonePe are expected to follow suit in the near future. Additionally, companies like Reliance Jio and Reliance Retail are poised to unlock value through demerger from Reliance Industries, providing additional opportunities for investors, it said.

Disclaimer: The views and recommendations expressed above are those of individual analysts or brokerage firms and not of Mint. We recommend that investors consult certified experts before making an investment decision.

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