India IPO Frenzy Calls For Robust Foreign Flows To Avert Jitters In Listed Stocks

India's initial public offerings are in high demand, with foreign investors aggressively participating in the primary market. However, there might be trouble brewing for the already listed stocks.

Given the hot issues in the primary market, analysts warn about the necessity of increased inflows to stop foreign investors from switching away from the secondary market.

The answer to increased inflows lies in the hopes of a soft landing in the world's largest economy. If soft landing comes under a bit of doubt under a rate cut cycle, inflows into risky assets will take a hit, according to Vikas Kumar Jain, equity strategist at CLSA Research.  

The boom in the country's public offers is on a record trajectory as the funds raised in the last three months potentially set to the top nine months of fundraising.

So far this year, about 62 companies have mopped up a total sum of Rs 84,512.6 crore so far, the highest since 2021.

Bigger issues are coming up like Hyundai Motor India Ltd., NTPC Green India Ltd., the Softbank-backed Swiggy Ltd., and Ather Energy Pvt. These four companies alone will raise over Rs 36,850 crore if and when they go public this year.

"We head into a period where there is going to be a big race in terms of supply with upcoming IPOs and other fundraisings," Jain said. Funds raised in the last three months could come in more than what we saw so far, he said.

That is how the caution for the listed stocks looms. If there are no incremental flows, a lot of foreigners interested in IPOs may sell out in secondary markets and invest in public issues, Jain said. "That could cause some nervousness in the secondary market."

Given the returns from listing day and overall gains, presently IPO market seems to be more appealing than listed stocks, according to Samir Bahl, chief executive officer, investment banking, Anand Rathi Advisors.

The IPO market demonstrated impressive performance compared with the modest returns of 16% and 14% in Nifty and Sensex, respectively. "These figures highlight the growing appeal of IPOs compared to established listed stocks," Bahl said.

Foreign investors have been pumping liquidity into India's primary market while the scrips trading in the secondary market have become costlier.

In 2024, foreign investors bought shares worth Rs 65,664.8 crore in the primary market, which consists of initial public offerings, preferential allotments and sales to large investors. This is the highest since 2021, according to data available on the National Securities Depository Ltd.

Meanwhile, FPIs have bought stocks worth Rs 26,679.3 crore in the secondary market.

The primary market offers the potential for substantial initial gains, Bahl said. "However, these investments can carry higher risks, especially if the company’s performance does not meet expectations.

Significant inflows into upcoming IPOs this year appear likely given the number of companies that are seeking to go public, Bahl said.

A soft landing is very rare and has happened only a couple of times in over 100 years in US history, Jain said. However, the equity market has taken a "comprehensive and convincing" view that the US is getting into a soft landing.

"If there is a rate cut and the narrative of soft landing continues then we can be hopeful of more inflows into the EM market." If not, there would be no incremental inflows, he said.

What makes "this cocktail" even more interesting is what China has done in the last few days. In the rare high-level press conference earlier this week, interest rate cuts, liquidity for banks and incentives for homebuyers, were announced to revive China's economy.

However, analysts said that this is not enough for a sustained run. If there is a rally in Chinese markets, then there is going to be allocation away from India, according to Jain.

That is where getting these incremental flows from the FII perspective will be even more important, as we are likely to see very big demand for new IPOs coming in the last quarter.