When IPOs and Mutual Fund SIPs Converge: A Market at Crossroads
The Mumbai stock market has seen a stellar performance, largely fueled by domestic investor confidence and significant inflows from institutional and individual investors. Despite rising global uncertainties, Indian equities have outperformed most markets. However, concerns are growing over high valuations and the impact of an upcoming wave of IPOs. With a surge in new stock offerings, including major names like Hyundai and Swiggy, the market faces challenges that could threaten the ongoing rally.
IPOs and Mutual Fund SIPs Converge
One key driver behind the impressive surge in Mumbai’s stock market has been the nation's unwavering confidence in its domestic growth trajectory. This optimism spurred an unprecedented flow of funds into equities, even as global investors displayed caution.
Over the past two years, domestic institutional investors (DIIs) have consistently invested significant sums. Alongside them, individual investors have also poured in billions directly into the stock market. In fact, DIIs have injected a staggering $107 billion into the market over the last four years, dwarfing the $19 billion contributed by foreign institutional investors (FIIs). This massive influx of domestic capital has played a crucial role in powering the stock market rally.
As a result, Indian stocks have outperformed many global counterparts. Over the past year, the Nifty index has surged by 31%, while the Nifty Midcap 100 has climbed 48%, and the Nifty Smallcap 100 has risen 50%.
However, the sharp rise in valuations has raised concerns. Data from Motilal Oswal reveals that India's market capitalization has jumped by 55%, compared to a 22% increase in global market values.
India's economic growth rate, exceeding 8%, and robust corporate earnings provided a strong foundation for the equity rally. At the same time, rising demand for stocks has pushed prices higher. But this dynamic is changing.
As is typical in any market where demand surges, supply follows. Companies and service providers are now looking to take advantage of the fervor created by eager investors chasing quick returns.
Nifty’s 24% annual earnings growth helped justify the surge in retail participation, which has pushed domestic equity inflows to outpace foreign portfolio inflows by 5.5 times over the past four years.
By September, 120 companies had filed to go public, up from 112 in 2023 and 89 in 2022. So far, 62 companies have raised INR 64,485 crore through IPOs, compared to INR 49,436 crore last year, according to Prime Database.
Beyond IPOs, private equity investors and company promoters have also been cashing in on the bullish market by offloading shares in block deals, further increasing the supply of stock.
Total funds raised by companies and private equity investors have reached INR 1.65 lakh crore in the first nine months of this year, the highest in three years. This figure is expected to grow, with at least INR 60,000 crore worth of IPOs in the pipeline, including offerings from major companies like Hyundai Motor, Swiggy, and NTPC Green.
While these companies operate in high-growth sectors, there’s uncertainty about how this influx of new stock will affect the secondary market.
A large part of Indian institutional investment is driven by the Systematic Investment Plans (SIPs) of mutual funds, which contributed INR 1.99 lakh crore last fiscal year. In the current year, SIPs have averaged INR 18,900 crore per month.
However, with mutual fund inflows rising by only 3% in August, there are concerns about whether this will be enough to absorb the INR 60,000 crore of new IPO stock expected in the coming months, in addition to block deals that are in the pipeline.
The combination of historically high valuations, slowing earnings growth, and international funds being redirected towards China due to stimulus measures could threaten the market's rally. The increasing supply of new stock from IPOs adds another challenge.
