Equity sales deluge threatens to bury India stock surge
MUMBAI (Reuters) - Serious doubts are emerging about the continuation of the sizzling rally in Indian stocks as they are set to compete for funds with a raft of potential equity offerings, several of them of doubtful quality.
A pullback at this stage for India's stock market, which has risen nearly 90 percent from 2009 lows hit in early March, could curb foreign fund inflows and choke off funding for companies in Asia's third-largest economy.
More than 30 companies have announced plans to raise about $8 billion through share sales in 2009, according to Thomson Reuters data, and more are expected to join the fray.
State-run companies could swell the supply if the recently re-elected ruling coalition pursues divestments, which had been stalled in its previous five-year term due to opposition from its former leftist allies who were drubbed in April-May elections.
"This can absorb a large part of the equity flow that could have come to the secondary market," said Navneet Munot, chief investment officer at the fund unit of the country's top lender, State Bank of India (SBI.BO).
"If there is too much supply of equity, then structurally that means returns on equity going down. That's one of my worries," said Munot, who oversees about $7 billion in assets.
Already there are concerns about Indian shares becoming expensive after the main index .BSESN rose 57 percent this year, making it the third-best performer in the world.
The benchmark trades at nearly 17 times 12-month forward earnings, up from about 9.5 times in March -- and only cheaper than Chinese shares .SSEC that trade at a multiple of 22, among major indices, according to Thomson Reuters data.
"We can see why investors are expressing discomfort with this situation," said Ridham Desai, head of India equities research at Morgan Stanley. "Valuations are rich, and paper supply will likely rise in the short run."
Foreign funds have poured more than $6.5 billion into Indian shares since mid-March, with the momentum picking up after the Congress party-led coalition won an unexpectedly comfortable victory in national elections.
The win has raised expectations Prime Minister Manmohan Singh, who as finance minister in 1992 had opened up the economy, will pursue more reforms such as relaxing foreign investment limits in insurance and pensions.
Indian companies may sell shares worth up to $30 billion annually over the next three years as the return of economic growth draws investors back, a senior official at Morgan Stanley said recently.
Oil and gas exploration firm Cairn India (CAIL.BO), refiner Essar Oil (ESRO.BO), JSW Steel (JSTL.BO), Indiabulls Financial Services (IBUL.BO) and real estate developer Puravankara Projects (PPRO.BO) are among those planning to sell shares in 2009.
HIGHER RISKS
The quality of equity offerings is a concern.
BNP Paribas analyst Manishi Raychaudhuri said more than half of the equity issue pipeline comprised debt-ridden real estate and construction companies, some of whom have not said how they plan to use the funds.
"If these issues lead to a significant capital loss for investors, it could lead to risk aversion on Indian equities increasing yet again," Raychaudhuri said in a report last week.
Eleven cash-strapped firms have raised more than $2.6 billion in share sales this year, including through preferential allotment to large investors, known as qualified institutional placement (QIP).
"If you look at the quality of those QIPs, they are so bad that they can only be done if the market is very good," said Samir Arora, a fund manager at Singapore-based hedge fund, Helios.
(Editing by Ranjit Gangadharan and Muralikumar Anantharaman)
