The primary Indian market is gaining momentum and it is not an aberration. Here’s why

The spectacular debut of IndiGo , India's biggest airline by market share, on the bourses on Tuesday, not only reflected investor’s confidence in India’s potential as one of the world's fastest growing aviation markets but a possible resurgence of the primary market after a prolonged lull. This was despite a premium valuation at around $4 billion (it is twice as valued compared with the combined valuation of peers Jet Airways and SpiceJet).

For a perspective, InterGlobe Aviation Ltd, which runs the carrier, raised $453.52 million last month through its initial public offering, which was the largest IPO since telecom tower firm Bharti Infratel Ltd raised $750 million in December 2012.

IndiGo’s blockbuster market entry is a sharp contrast to the debut of Coffee Day Enterprises Ltd (that runs India’s largest cafe chain Cafe Coffee Day) as it struggled to sail through and revive hopes that the IPO market in India is finally turning around.

Last two years have been a dismal period for the primary market in the country, reflecting the lack of momentum that prevailed across the broader market prior to the Narendra Modi-led Indian government assumed power.

The lacklustre history of the IPOs, launched in the last decade and underperformed, also proved to be a dampener for investors who have already been skeptical about the slow pace of structural reforms that are needed to revive market sentiments.

Complex listing rules also pulled back companies from tapping the primary market to raise funds—till recently the IPO market was governed by archaic rules that have existed for decades.

In addition, companies, especially those in the booming technology sector, have been exploring alternative sources of finance. For example, while e-commerce major Flipkart raised more than $1billion from Private Equity investors over the last one year, its close competitor Snapdeal raised close to $1billion. Ola, India’s leading taxi-hailing app, which raised roughly $650 million from Private Investors recently, is another example of next-generation technology-driven startups that are tapping the PE source of funding for growth.

However, the prospects of the IPO market seem to be changing. More than a dozen companies have filed draft papers with markets regulator SEBI for public offers since the new government took charge at the Centre in May 2014. Besides, many companies, which scrapped their IPO plans earlier due to bad market conditions, have been keen to make another attempt to enter the capital markets.

These translated in to a modest uptick in IPOs during 2015, after two years when the primary markets were almost dead. Though the money raised through IPOs this year is small compared with $8 billion raised in 2010, the last time Indian primary markets really took off. But, it is believed to be a trigger for more sizable IPOs going ahead.

The renewed confidence of investors, especially FIIs, after the Modi government took over contributed to the revival of the secondary market—where investors trade previously issued securities—which peaked over a year since BJP came to power and thus provided fodder for an uptick of the primary market as well.

Of course, the markets are seeing a correction—bench market indices BSE Sensex and Nifty lost more than 10% over two months—driven by the slower growth numbers reported by China.

However, India’s long-term story remains intact as it can turn China’s pain into its gain as an alternative investment destination for large FIIs.
India continues to be among the most favoured by emerging market investors given the country's strengthening macro fundamentals. Though concerns over the economy as well as cultural tolerance have risen recently, they haven't hampered investor sentiment significantly.

Also, as indicated by the government’s move on Tuesday to further relax FDI norms in over 15 sectors, including defence, realty and broadcasting, the policy initiative to bring in structural reforms is still well on track. Therefore, the chances of a continued revival of the primary market are bright.

The IPO activity is expected to gain more momentum driven by the enhanced need for the companies to go beyond the Private Equity route to raise capital for growth and expansion. Many companies and investors are also turning to the IPO route as a preferred option for generating liquidity.

The renewed interest in IPOs is also driven by private-equity backed firms which are capitalising on the positive market sentiment to provide an exit for their investors.

According to Dealogic, Indian companies have raised around $1.03 billion via IPOs so far this year, well above the $282 million for all of last year and $295 million in 2013. More companies in sectors such as banking and financial services, technology, logistics and pharma are expected to tap primary markets in the near future.

While size of the IPOs raised in India remain relatively small compared with those seen in the US or other Asian financial capitals such as Hong Kong and Tokyo, the uptick in the primary market proves that activity seen by the secondary markets after May 2014 is not just an aberration and strengthens India’s status as a preferred investment destination amid shades of gloom elsewhere, including China.

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