Feb 3, 2007

IPO Frenzy in India

After a big initial public offering season last year, some 150 companies are expected to raise up to $10 billion in new listings in 2007.

Projections of double-digit economic growth, a roaring bull market, and expansion-minded executives has set the stage for another year of frenzied initial public offering activity in India. 2007 could be a record-buster.

One reason is the Bombay Stock Exchange benchmark Sensex Index, which delivered a nearly 50% return last year and is up about 2.4% so far in 2007. In all, some 150 companies will list this year and raise an estimated $10 billion. In 2007, more than 30 companies have already filed or received approval from the Securities and Exchange Board of India to raise $6.3 billion.

Last year's IPO activity, even with a market crash in the Sensex in late spring, was extremely robust despite worries by some that the Indian stock rally had run its course. Yet when stock prices resumed their march upward later in the year.

Even so, investing in India IPOs overall has been a risky affair. About 50% of the Class of 2006 initial offerings are today trading at break-even or below their listed price. One of the real disappointments last year was Jet Airways, India's biggest domestic airliner. It launched trading one year ago just as oil prices started their ascent to record levels by mid-year and budget carriers started to pressure margins. Jet's share price is off 30% to 763.95 rupees ($17.32) from its initial trading price back in February, 2005. No-frills carrier Air Deccan, which also debuted last year, has fared better and now trades at $3.40 per share vs. a listing price of $2.20.

This year's incoming group of aspiring companies is likely to be more broad-based and involve more established companies in real estate, banking, telecom, IT, media, and retail, as well as a few public-sector spin-offs such as Power Finance Corporation and Power Grid Corporation. "What's heartening is the fact that most of the sectors accessing the market have delivered profits in the past," says Narayan, managing director of Kotak Securities.

Part of the IPO bonanza will be driven by venture capital and private equity firms exiting from earlier start up investments. Some 15 such firms will be selling off equity stakes for cash, according to the trade group Venture Intelligence.

With India desperately struggling to rev up its infrastructure, from roads to power to ports, a host of real estate and infrastructure companies will enter the market. The largest IPO this year will probably be New Delhi-based real estate company DLF, which is benefiting from India's booming commercial and residential construction market. Last August, the company shelved an IPO to raise about $2.5 billion to pay debt and fund construction after minority investors complained. A smaller offering is expected this year in the $2 billion range.