Observed by some as the beginning of a multi-year expansion of India's 3.2 trillion-dollar stock market, newly listed stocks in the country are beating the benchmark indices by the most in seven years, reports Bloomberg. The development is helped by a pace of initial public offerings (IPO).
A set of firms listed in the past two years has outperformed the Nifty 50 Index by more than 40 percentage points this year. This is the most significant lead since 2014. The prominent among the firms had been the food delivery app Zomato, India first "unicorn", which had reached 77 per cent after its debut last month. ("unicorn" in stock market parlance means a start-up that reached the valuation of 1 billion dollars)
According to Raj Balakrishnan, the head of India investment banking at Bank of America, the number of unlisted firms valued at 1 billion dollars will more than double over the next three to five years. Even if 20 to 25 per cent of these firms are listed, he said that market capitalisation between 400 and 500 billion dollars could be easily added.
Tech start-ups are booming in India's emerging Internet market, and regulators have recently made it appealing for them to list shares at home. So far, they have raised 8.8 billion dollars in local IPOs in 2021, and the pipeline for the rest of the year includes digital payment service Paytm and beauty products e-commerce site Nykaa.
Balakrishnan said that internet companies account for up to a quarter of the US and China stock markets, while it is less than 1 per cent of India's total equity valuation. This leaves ample room for growth.
Gopal Agarwal, managing director and head of investment banking at Edelweiss Financial Services, suggests that rules announced recently by the Security and Exchange Board of India (SEBI) should ensure more firms list at home instead of going overseas. He said a change in the rules is needed, including adopting the globally accepted concept of controlling shareholder accountability, moving away from India's traditional focus on family-controlled corporate founders or promoters. He opined that the rules also narrow the post-IPO lock-up period for founders and investors, including venture capital and private equity funds.
According to Agarwal, the simplification of the controlling structure will encourage many start-ups to IPO proceedings. He noted that local listings are becoming more attractive due to high valuations, and he believes Indian stocks like Zomato are worth it due to their higher expected growth than rivals in China or the US.