Money
Behind the boom: How supply dynamics are fuelling market peaks
Summary
- Adam Smith’s proverbial “invisible hand” responds to an increase in demand and prices, with an increase in supply. This is now visible in the Indian market as well.
Even as newspaper headlines celebrate equity mutual fund inflows surpassing ₹45,000 crore in June, with systematic investment plans (SIPs) exceeding ₹21,000 crore (growing 9x in the last 10 years), we should remain cognizant that like any true market, equities have two sides to the equation–demand and supply.
As demand remained strong and price (valuations) moved up, supply has picked up. June witnessed company promoters and private equity (PE) firms selling stakes worth ₹60,000 crore.
Frontline indices have also been hitting record highs and market capitalization has surpassed $5 trillion.
Market multiples have expanded, primarily due to the growing domestic demand for equities. Inflows from SIPs and equity contributions from pension schemes such as Employees' Provident Fund (EPFO) and National Pension System (NPS), and insurance are estimated to grow by ₹3.3 trillion ($40 billion) annually.
Also Read: Why hike in share buyback tax announced in the Budget hurts investors
The less frequently discussed factor is the “supply" side of the market. Adam Smith’s proverbial invisible hand responds to an increase in demand and price with an increase in supply. This is now visible in the Indian market as well.
The multiples at which companies are now trading are attracting more private companies to list, prompting strategic investors to take profits, and encouraging both local and multinational promoters to divest.
In the last 15 months, promoters sold ₹1.86 trillion and PEs ₹1.15 trillion, in addition to ₹1.8 trillion of initial public offerings (IPOs) and qualified institutional placements (QIP); aggregating to ₹4.84 trillion, outpacing the ₹3 trillion net inflows into MFs.
The supply is only set to accelerate. Upcoming quarter’s IPO volumes are 3X of Q1FY25, with an IPO pipeline of ₹93,000 crore. The IPO count doubled in FY24 to 76, and 15 firms went public in Q1FY25.
Shares locked in from the 91 IPOs, are up by an average of 79% since listing and should find their way to the market. Notably, nearly two-thirds of IPO funds were for stake sales by PEs and promoters, with only 6% allocated for capex.
Also Read: Removing indexation on real estate will benefit almost nobody. Here's proof.
High market multiples are prompting stake sale by promoters with nearly a dozen subsidiaries of MNCs in India trading at around 4x of their parents trade at the home market.
In fact, many MNC promoters trimmed stakes. British American Tobacco’s divestment of ITC shares, Whirlpool and Timken are a few examples. Other MNCs are also seizing the opportunity to capitalize on valuation disparities, with Hyundai planning a large $3-billion IPO and LG contemplating a similar move.
With over 100 firms trading at over 50X their earnings, Indian promoters are also pruning stakes. In June alone, promoters of 20 firms sold upto 20% stakes, raising ₹40,000 crore. PEs have reaped the most benefit from rising equities, selling shares worth ₹1.15 trillion, in addition to stakes offered in IPOs.
This brisk pace of exits mirrors the decline in net foreign direct investment (FDI) with annual FDI outflows rising from ₹2.25 trillion in 2022-23 to ₹3.4 trillion in FY24. PE funds still hold an additional ₹2.7 trillion worth of stakes in listed firms of which ₹2.2 trillion is of over three-year vintage.
Similar vintage investments in private companies are estimated to be worth over ₹7.4 trillion, ensuring sales from them is only likely to accelerate in the coming year.
Also Read: Surviving the front-running storm: An investor's handbook
Since April 2023, the aggregate supply response to increased retail equity flow amounted to ₹4.84 trillion, including ₹1.86 trillion promoter stake sale, ₹1.15 trillion PE divestments, ₹80,000 crore via IPOs and ₹1.03 lakh through QIPs. This figure is nearly 158% of the net flow to equity mutual funds.
Robust financial markets play a pivotal role in mobilizing capital and contribute significantly to a country’s economic growth. A growing equity culture promises to solidify this as a dependable source of growth capital.
However, it is imperative to acknowledge the dichotomy of interests: while some seek to acquire capital or invest, others aim to divest at opportune valuations.
In the grand tapestry of the market, every thread has its place, and every player, their role. It is, after all, the essence of fair play.
Ashish Gupta is chief information officer of Axis Asset Management Co. Ltd
