Will there be a revival in the IPO markets soon? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will there be a revival in the IPO markets soon? 

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In this issue:
» What China's export focused strategy is doing
» India's GDP growth still better than peers
» Tax on diesel cars on the anvil
» Is India facing stagflation?
» ...and more!

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There was a time, somewhere in 2006 and 2007 when initial public offerings (IPOs) were the apple of the investors' eye. In India certainly, a slew of IPOs made their debut, many of them at high valuations. But as the sentiment was positive and liquidity quite high, investors lapped them all up. All this completely took a turn for the worse when the global financial crisis struck in 2008.

Since then, the IPO market has failed to match those heady days of 2006 and 2007. And not just in India, appetite for IPOs has flagged in many Asian economies as well. China, which at one point was a hotbed for global investors on the back of its booming growth, has also seen interest in public offerings waning. Some statistics give an idea of the overall picture. According to Dealogic and published in the Economist, there have been 165 new issues so far this year in Asia excluding Japan, worth US$ 17.2 bn. That is the lowest level at this stage of the year since 2009, when the global economy and stockmarkets were in turmoil. Infact, by this time last year there had been 264 deals worth US$ 54.4 bn. The reasons for this are not hard to find. Europe languishing in a deepening debt crisis and the US growing at a sluggish pace has rubbed off negatively on the Asian continent. The fact that the Facebook IPO turned out to be a damp squib has not helped matters either.

Will there be a revival in the IPO market? It all depends. For instance, companies asking for astronomical prices are not going to find any takers. Especially when the global economic environment is so uncertain. But if companies with good business fundamentals come out with issues at reasonable prices, there is no reason why investors should not put their money in them. In fact, one of the reasons why the Indian government's disinvestment program was successful in FY11 is because many of these PSUs were reasonably priced and had strong balance sheets. We are not sure when there will be a revival in the IPO markets this year just as we do not believe in taking a call on where the stock markets are headed. What we do know is that, whether you choose to invest in companies already listed or in IPOs, the basic principles of investing (notably looking at companies with strong management, good growth prospects and attractive valuations) remain the same.

Do you think we will see a revival in the IPO market this year both in India and Asia? Share with us or post your comments on our Facebook page. page / Google+ page.

01:26  Chart of the day
India's GDP growth of 5.3% in the January-March 2012 quarter shocked many in the country. It reflected the progressive slowdown in the economy over the quarters and sent the government and economist alike scrambling to makes some sense of the numbers. That said, as today's chart of the day shows, India's GDP growth in Q1, 2012 was still better than a lot of its peers barring China. As Europe continues to be haunted by a never ending debt crisis, emerging economies have also begun to face its repercussions.

Data Source: The Economist

Even as efforts go on to try and keep the Euro zone intact, the absurdity of it all is reaching feverish proportions. Sample this. As per a wealth manager Douglas Blake, one of the member nations, Italy, seems to be borrowing at 6% and is in turn cobbling up around 22% of the bail out money to Spain at 3%. In other words, it is taking loans at 6% and lending out the same to Spain at 3%! This is not all. Talks are doing the rounds that the situation seems so bad that at some point of time, they are going to need to bailout the earlier bailout. Playing with words aside, some sense really needs to be drilled into the heads of European policymakers. Investors have begun to grow frustrated with this game of musical chairs and they need to have some certainty before they start investing again. Till such time a definite outcome comes, volatility is likely to be the name of the game we believe.

Pockets of growth in emerging economies are oases of sorts. In the growth parched global economy, China, India, Brazil, South Africa and Russia continue to be havens of prosperity. China, more so, because of its strong fiscal balance and robust forex reserves. The Mandarin economy has been the cause for economic growth of several developed nations over the years. China's gargantuan demand for commodities has fuelled the commodity boom. From oil to coal to steel and aluminum, China's appetite for commodities has been hard to satiate. However, in recent months, the country has focused more on exports. In the meanwhile, the economic pullback has shrunk its imports. The sudden change in China's trade balance has hurt its trading partners more than China. Economies like the US and Australia were depending heavily on export of commodities to China. They now have to contend with muted demand. At the same time, China's export focused growth strategy is draining off capital from other nations. It is time the world realizes that depending on a single growth engine could be disastrous. America has already taught us this lesson.

Life is not getting easier for Indian car makers. The increase in petrol prices and interest costs had started to dampen the demand for cars. The only ray of hope lay on the growing demand for diesel cars. Most aspiring car buyers switched their interests to diesel cars due to the huge price differential between petrol and diesel. But the oil ministry plans to end this too. It is planning to impose a special tax on diesel vehicles. This tax would raise the prices of these vehicles by nearly Rs 2.55 lakhs. To control the dieselisation, the government plans to impose a tax of Rs 170,000 on small diesel cars. It also plans to impose a tax of Rs 255,000 on medium and large vehicles. The car manufacturers have vehemently opposed this tax for quite some time. But to no heed. Looks like the diesel tax is here to stay. Would this mean that the party for the auto industry has come to an end? Probably for the short term it has.

What are the two main factors that can adversely affect your purchasing power and savings? One is stagnating income growth. The other factor is high inflation. In either of these scenarios, your savings and investments tend to be affected. But what if both of these evils strike together? In such a case, you are dealing with a deadly phenomenon called stagflation. Imagine the size of the trouble if such a condition hits the entire economy.

The important question we need to ask ourselves is whether India is facing such a situation. Before jumping to conclusions, let's quickly browse through some key facts. Take India's GDP growth rate. The data released for the Jan-March quarter puts the GDP growth rate at 5.3%. This has taken the full year growth down to 6.5%. Compare this with 8.4% reported during the year ended March 2011. It must be noted that this is not a sudden dip that can be ignored as mere noise. The slowing growth has rather been a trend, slowing every consecutive quarter. On the inflation front, there has been hardly any reprieve. The wholesale price inflation (WPI) stood tall at 7.23% on a year-on-year bases for April 2012. For consumers, the inflation rate has been much higher at 10.36% in April 2012.

Be it growth or inflation, India has trouble on both these fronts. Of course, it would be a bit early to conclude. However, the indications of an impending stagflation are certainly there. Policymakers would do well not to ignore this ominous sign.

Are heady days of growth over for India? After expanding by 8.4% in FY10 and FY11, GDP growth slumped to a 9 year low of 5.3% in 4QFY12. On the back of this slowdown, growth for FY12 slumped to a low of 6.5%. Now as per its latest estimates, the World Bank believes that the Indian economy will only grow by 6.9% in FY13. This comes in well below the government's target of 7.6%. Policy uncertainties, a worrisome fiscal deficit and rising inflation are the major pressure points. If fact, even till FY15, the institution believes that India will not clock in growth over 7.5%. Negative headwinds from the Eurozone has caused a steep deceleration in exports and a reversal of portfolio inflows. Emerging markets are set to face tough times in light of slowing domestic demand and an overseas slump. With expectations of further monetary easing and increased infra investment, India is making an attempt to revive sentiment. While more action on the policy front is required, let's hope that these moves have the desired impact.

In the meanwhile, the Indian stock markets had a rather volatile trading session as they oscillated to either side of yesterday's close. At the time of writing, the BSE Sensex was up by 23 points. Gains were largely seen in FMCG, healthcare and IT stocks, while auto stocks were at the receiving end. Asian stock markets were trading mixed, while European markets too started the day on a mixed note.

04:56  Today's investing mantra
"Partly, it's habit. Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices." - Warren Buffett

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    2 Responses to "Will there be a revival in the IPO markets soon?"

    sunilkumar tejwani

    Jun 13, 2012

    fully agreed with your views, reasonably priced initial public offerings will see better subscriptions, and greedy issuers of capital will have to recall their public issues like the ones we have seen in the recent past of Mother son Sumi group and a couple of years ago of Wockhardt hospitals and Emmar MG F.


    g r chari

    Jun 13, 2012

    When there are hardly any buyers (both retail & domestic institutions)in the secondary market, how can one expect the IPO's to sail through? Only bullish sentiments in the market and that too at the peak of the bull market that IPO's do well and get a fancy price for their offerings.

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