Despite this pessimistic view, there is consensus among specialists that India is reasonably insulated to the US subprime crisis which is currently haunting global equity markets.
ôOur clients are generally positive that India is less at risk than other markets, both regional and global,ö remarks an investment banker in equity sales.
In tandem with other Asian market indices which were bullish for the better part of 2007, India's Sensex hit an all time high of 15,794 on July 24. During the first two weeks of the market downturn, the index shed around 6% from its peak. The correction was milder than some Asian markets, which plummeted up to 9%.
ôThe Indian economy is largely domestically driven. Exports account for less than 20% of Indian GDP,ö explains Manishi Raychaudhuri, UBS IndiaÆs strategist. ôUnlike other Asian countries, India is less affected by concerns over a possible slowdown in the US.ö
Raychaudhri is right. Strong corporate performance in India has resulted in the Indian economy registering a growth rate of 9.4% in 2006/07, its highest in over a decade. Growth estimates from various agencies for 2007/08 are in the 8.5%-9.25% range, primarily on the back of demand from India's own billion-strong population and the service sector.
A less developed debt market is probably another reason India is less vulnerable to the US subprime turmoil.
ôCDOs (collateralised debt obligations), CLOs (collateralised loan obligations) and similar products are not yet actively sold in India, and the bond market is still shallow. All in all, securitisation hasnÆt really taken off. Therefore, the issue is relevant to more developed markets but not so much to India,ö observes a senior banker from IndiaInfoline.
Investors donÆt seem to be paying heed to all these arguments, though, as markets corrected further last week. The Sensex lost 4% on August 16 in a single trading day, the same day the Korean Kospi plunged 7%. (In both markets the correction was larger because trading was closed the previous day, August 15, due to national holidays so opened to a large correction.)
ôIndia is not yet strong enough to weather a big external shock,ö comments an India strategist. ôIt is not disconnected from what happens in the rest of Asia despite all the talk of India decoupling from other Asian markets.ö
ôIf global equities remain volatile, Indian markets will remain fickle,ö adds the IndiaInfoline banker. ôBy and large, we donÆt think Indian companies are at risk, but risk is still correlated with global equity markets. If interest rates and equity risk premiums surge worldwide, we will see valuations compress in Asian markets, including India.ö
And what of primary issuance?
In the primary market, the immediate reaction has been to put issuance plans on hold rather than bring them to a complete standstill. According to a banker, companies seeking to raise equity are adopting a wait-and-watch strategy, especially because some recent issues have faced challenges.
Investors were generally apathetic to the initial public offering of KPR Mill launched in early August. The Indian apparel company priced its Rs1.3 billion ($32.7 million) deal at the bottom of an indicative range of Rs225 to Rs265, as the deal just about achieved one-time subscription.
Indian real estate developer, Puravankara ProjectsÆ larger Rs8.6 billion ($210.8 million) IPO did not fare much better. The deal was launched in late July and the non-institutional and retail investor portions struggled to get covered. The range was reset, the issue period extended and finally the issue priced at Rs400, the floor of the indicative range.
Bankers close to the deal suggest PuravankaraÆs problems were mostly timing-related. ôThe Indian market corrected 6% and real estate comparables shed 12%-15% during the marketing,ö says a source. ôLuckily, the company has a unique positioning as a high-quality South India realty play, which institutional investors appreciated even in the prevailing market.ö
Another reason investors have shied away from primary markets could be because some recent issues have opened below issue price. IVR Prime Urban Developers, a subsidiary of IVRCL Infrastructure and Projects, traded 24% down on its market debut to close at Rs418 on August 16. Alpa Laboratories, a pharmaceutical manufacturer, also lost 18% on August 6, its first day of trading.
ôThe poor response to some recent IPOs was primarily because retail investors have become more selective as a result of high prevailing valuation levels,ö argues a banker, suggesting it is not all subprime related.
Concerns are also being voiced that a sluggish primary market could adversely affect economic growth, since companies turn to the primary markets to raise money to fund capital expenditure.
ôIn the long run we donÆt expect any serious slowdown in the primary market,ö says UBS' Raychaudhuri. ôWe expect the aggregate industry spend on capex will be somewhere around $300 billion over the next three to four years, which is in excess of cash generation by these companies. Capital will continue to be generated from equities and debt issues.ö
Flight to quality
In the near-term the euphoria with which some foreign institutional investors viewed Indian stocks may have changed, but generally analysts remain optimistic on the state of the market.
ôBlockbuster IPOs garnering huge levels of over-subscription may be a thing of the past but we remain positive on the ability of companies with strong fundamentals to continue to raise money at reasonable valuations,ö says a specialist.
Bankers are also cognizant that Indian markets went through a period when almost anything could be sold at a high valuation and are now suggesting that the current correction could trigger a long overdue flight to quality in the country.
A banker from a leading ECM house sums up: ôThe doors are still open for companies with identifiable growth prospects. Near-term we may witness a quiet period as market sentiment and global liquidity stabilise. Medium- to long-term investors continue to be bullish on India and will invest in the secondary markets and buy quality primary paper.ö
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