IPO Boom Will Continue To Aid India's Market Rally, Says Market Expert G Chokkalingam

Indian markets achieved a historic feat as they hit the $4-trillion market capitalisation (m-cap) milestone for the first time on Thursday last week. The National Stock Exchange’s m-cap breached $4 trillion (about Rs 334.72 lakh crore). On the same day, the Nifty 50 and Nifty 500 hit all-time highs of 20,291.55 points and 18,141.65 points, respectively, extending the rally beyond large-cap stocks.

The rally was primarily driven by two factors. India’s gross domestic product (GDP) growth and the influx of retail investors in the Indian markets. Several global institutions and brokerage firms have said that India is projected to become the third-largest economy by 2030, which has given tremendous confidence to domestic investors. 

“Domestic investors (DIs) have got tremendous confidence. And that has led to inflow of a lot of retail investors. In fact, this week, we are likely to cross another theme - investor base is likely to be more than 15 crore within a few days. Every week the number of new investors on the Bombay Stock Exchange is anywhere from five to eight lakh, and that is continuing for the last three years in a row,” veteran market analyst and investor, G Chokkalingam of Equinomics Research, told The Core. In the second quarter of the ongoing financial year accelerated to 7.6% from 6.2% a year ago. GDP growth in the first quarter of the ongoing financial year was 6.5%. 

Drivers Behind Rally

India has joined the US, China and Japan and Hong Kong in the $4-trillion m-cap club. With an m-cap of almost $48 trillion, the US is the world's largest equity market, followed by China ($9.7 trillion) and Japan ($6 trillion). According to Bloomberg data, India’s m-cap has risen nearly 15% so far this calendar year, even as China’s has seen a 5% erosion, according to the Business Standard.

India’s gains this year have been driven primarily by the gains in the broader mid- and small-cap stocks. Stocks outside the top 100 now contribute 40% to the country’s m-cap, up from 35% during the start of this financial year. “In the last 30 years, I have not seen this kind of concentrated rally in the small- and mid-caps since the March 2020 low. And anywhere from 60% to 400% has been the outperformance of the small-cap index over Nifty and Sensex since March 2020-low,” he said. 

IPO Boom To Aid Further Rally

However, the overvaluation has also got corrected in the last 16 years, as per historical data.

When small- and mid-cap stocks perform badly and the traditional markets undergo correction, DIs don't aggressively support the small- and mid-cap stocks. Their first effort is to support only Nifty and Sensex and then top 100 or top 250 stocks. However, currently, there are over 4,000 stocks in the markets, which means that the stocks beyond the top 250 suffer due to the lack of support from DIs. The resources mobilised by the many initial public offerings (IPOs) are depleting the liquidity available in the system.

“There is also the valuation bubble. Unbelievable bubble. I've seen 2000s’ dot com bull, 2007 infra bull. But this bull run is across all the sectors and segments, maybe except the large ITs. And there are many micro-cap companies. I looked at a company which has got more than Rs 1,300 crore loan. The interest provision is just Rs 30 lakh in the September quarter and the stock has gone up by four to five times from the bottom,” Chokkalingam said. 

All these factors have contributed to stocks getting highly valued but they would also undergo correction thereby restoring balance. While the markets achieved valuation growth with the $4 trillion, it is also a note of caution. A substantial part of the m-cap mobilisation came through the IPOs and it could grow further because of the IPO boom.

In recent years, the Indian equity market recorded an astounding surge in IPOs, ignoring larger global uncertainties. In 2021, 63 companies went public, raising Rs 1.2 lakh crore. Despite global market challenges, 2022 witnessed 40 IPOs, accumulating Rs 60,000 crore. As of November in 2023, 48 companies have already gone public, raising more than Rs 45,000 crore.

“The small- and mid-cap may suffer, but the large-cap might take off. This is what precisely happened in 2018 and 19. Almost all small-cap indices fell 25-30%. But the Sensex went up by 30%. That kind of situation can happen. Therefore, the $4 trillion figure might continue to grow, provided there are no uncertainties from the election results. And provided the oil price doesn't shoot up to a strong triple digits,” he said.