Markets with Bertie: IPO mania and the case of the ever-expanding valuation premium

Every week, Bertie receives an email from a global strategist featuring a chart that showcases India's valuation premium over other emerging markets. For years, the strategist has been calling for a mean reversion, which is just fancy finance jargon for "what goes up must come down, and what goes down will rise again." The message? Sell India, buy emerging markets.

But the premium has only grown, with no sign of reverting to the mean. While Bertie opens the email purely for the satisfaction of smirking at the chart, it seems emerging market companies are paying close attention—though not in the way the strategist would have hoped.

Firms with large Indian subsidiaries are rushing to file for initial public offerings (IPOs) of their local units. Bertie learned this when his kimchi-loving friend from Seoul called, seeking his advice on the valuation of the Indian subsidiary of a major automaker. The next day, the same friend connected Bertie with a consumer durables analyst, looking for similar insights.

Old-timers refer to George Fernandes as the father of Indian capital markets, given his role in making Indian subsidiaries of multinational corporations (MNCs) list locally. Bertie can’t help but wonder if that chart is becoming George 2.0.

IPO frenzy

Bertie steers clear of socializing in his professional circles—it’s dull at best and, at worst, a tiresome display of one-upmanship. Instead, he prefers the company of his right-brained friends, who talk art and theatre and drag him to places like Kala Ghoda. During one such art exhibition, his actor friend Abhi posed a question that made Bertie stop in his tracks: “Is that housing company really so good? ₹3 lakh crore of demand for a ₹5,000 crore issue—wow!”

Read this | Why history tells us to beware the IPO frenzy

Bertie had to quickly snap his finance brain out of its slumber to offer an intelligent answer. “You’ve heard of riskless profit, right?” he began, only to be met with a blank stare. Realizing this wasn’t B-school, he switched gears. “Would you enter a tambola contest if the entry fee is tiny, but the prize is huge?” Abhi nodded. “Even if you knew your chances of winning were slim?” After a moment's thought, Abhi responded, “Yes. There’s almost nothing to lose, but a small chance to win big—like a lottery.” Abhi had unknowingly explained riskless profit better than Bertie’s professor ever had.

“The process of applying for an IPO is so seamless these days, it costs next to nothing. The money never even leaves your bank account. And with markets the way they are, IPOs are opening at huge premiums over their offer price. It’s almost like a lottery,” Bertie concluded. “So don’t judge a company’s worth by its IPO demand.” Abhi smiled and said, “Just like one shouldn’t judge Mumbai’s housing market based on the number of MHADA (Maharashtra Housing Development Corp. Ltd.) applications.”

Bertie wondered if Abhi should take an aptitude test.

Emotional markets

In our last missive, a gloomy Bertie was seen seeking advice on investing in China. He was told to look for companies offering strong dividends and engaging in significant share buybacks. That turned out to be prescient. Last week, China’s policymakers opened the taps, encouraging share buybacks, among other measures. The emotionally driven Chinese market responded with its best week in nearly 15 years.

More here | Markets with Bertie: The perils of private equity and the elusive perfect match

A cheerful Bertie called his friend in Hong Kong. “Happily ever after, right?” he quipped. “Not so fast, my friend,” came the measured reply. “Yes, this move is stronger than previous attempts, but the proof of the pudding is in the eating.”

“Watch the consumer—whether she comes out and spends or just stashes the largesse in her bank account and watch property sales—they need to at least stabilize,” his friend advised, as Bertie scribbled furiously. “And never forget the golden rule in China: Buy despair, sell hope,” he chuckled.