India sparkles amid reforms and China's painful crackdown

Nov 09, 2021

INDIA'S equity market has been gaining more global attention at a time when Chinese firms are facing regulatory uncertainties and continued US-China tensions, making the country one of the most overweight emerging markets for yield-hungry funds.

China President Xi Jinping's "common prosperity" drive and zero-Covid tolerance have seen the MSCI China Index - which captures 85 per cent of the Chinese equity universe - fall almost 14 per cent year-to-date. In contrast, the MSCI India is up almost 30 per cent.

Robert Horrocks, chief investment officer and portfolio manager at Matthews Asia said the year has been a good one for India, with the one year performance differential with China reaching 60 percentage points on Sep 30.

"Why has India been so strong? Well, it's partly a recovery in earnings growth from the nadir of the pandemic," Horrocks said, adding that India has also seen strong growth in manufactured exports, notably in the automotive sector, as demand has recovered in South-east Asia and Latin America.

Investors have been pouring money into the red hot initial public offer (IPO) market, which has helped Indian startups raise US$10 billion this year, more than what was achieved in the past 3 years. The S&P BSE IPO index has returned more than 100 per cent year-to-date and 2021 is likely to be remembered as the year of IPOs in India.

The IPO pipeline remains robust. Some 150 companies, with an estimated valuation of over US$550 billion, could potentially seek to list in the next 36 months, according to Goldman Sachs.

"India's market cap could increase from US$3.5 trillion currently to over US$5 trillion by 2024, making it the 5th largest market by capitalisation, from 7th currently," the US investment bank said.

"Given maturing markets in China and the recent regulatory tightening, India could become the next alternative," it added.

Potential IPO aspirants comprise unicorns (firms that have achieved valuation above US$1 billion in their last funding round); firms that have reached sufficient scale and are generating at least US$100 million in annual revenues; and government divestments or privatisations.

Firms in the financial and e-commerce space will account for the lion's share of potential IPOs, with the new-economy tech-enabled sectors accounting for nearly half of the estimated value, Goldman Sachs said.

Swarup Gupta, industry manager at the Economist Intelligence Unit (EIU), said India's IPO aspirants are largely tech startups seeking to benefit from the Covid-driven digitalisation and rising adoption of digital payments. Reflecting this trend, the country's Unified Payments Interface (UPI), a government-backed fast payments system that is also open to IPO subscription, notched up a transaction value of more than US$100 billion in October and is on track to cross US$1 trillion in value terms within the first quarter of 2022 at the current pace of growth.

"The current tech boom has been in the making for a while with a strong investor appetite, both domestic and global, for what are perceived to be strong businesses poised to gain from a young and digitally literate middle class. As of date, technology companies have led the IPO wave, with healthcare in second place," Gupta said.

Investors now eagerly await a stake sale in the government-owned Life Insurance Corporation, likely to be one of the largest IPOs that India's equity markets have ever witnessed, the EIU analyst said.

Prime Minister Narendra Modi's government has indicated plans to sell stakes in several companies such as Bharat Petroleum Corp, Container Corp, Shipping Corp, Dredging Corp, Steel Authority of India, Hindustan Copper and IDBI Bank.

The surge in the number of unicorns in India in recent years is due to the rise of the Internet ecosystem, availability of private capital and favourable regulatory changes, including measures which make the listing of startups easier, Goldman Sachs said.

Gupta also reckoned that the improving Covid-19 situation amid rising vaccination rates and a decline in Covid-19 cases are driving the IPO spree. In October, India managed to administer 1 billion vaccination doses, fully vaccinating 31 per cent of its population, with 75 per cent having received 1 dose, raising economic optimism even further.

"This has catalysed a wider reopening of the economy and a consequent rise in optimism about economic prospects," he said.

The wave of IPOs is also being powered by an unprecedented increase in retail participation in the equity markets influenced to a great extent by the fear of missing out, Gupta reckoned.

"This is part of a global phenomenon, supported to a great extent by the rise of trading apps like Robinhood in the US and Zerodha in India, which have raised the ease of trading while charging low or no commission fees. At the same time, Indian investors, who are technologically aware, are increasingly cognisant of the virtues of long-term wealth creation."

While there had been a certain prestige factor for Indian tech firms to list in the US, this may not necessarily be the case anymore, said Amit Singh, partner, head of South and South-east Asia capital markets, Singapore, Linklaters.

Singh said: "The Indian stock market has matured, and Zomato becoming a unicorn has attracted international attention after its listing with a very attractive valuation. Several other unicorns have jumped in the line too."

Shares of Indian food delivery startup Zomato jumped as high as 82 per cent from its IPO price of 72 rupees during its market debut in July. On Tuesday, it was trading around 135.60 rupees.

Singh said listing in the US can be difficult, and it requires complying with US rules that entail a number of ongoing obligations post-listing.

"Although the US is a mature, diverse and sophisticated market, the Indian regulatory framework has matured as well, and companies are increasingly becoming comfortable with the idea that the Indian securities regulator is well-placed to regulate them, and there is a comfort in having your chief regulator be from the same country."