Happy Friday. Today, we’ll investigate why Indian investors are flipping IPO stocks quickly, then, we’ll close with Gupshup, a round-up of the most important headlines.

BTW: In 1970, India took on a “White Revolution” that made the country the world’s largest producer of what? (Answer at bottom)

Markets

Read here for an appendix on the above.

IPO Flipping Continues

In the past, Samosa Capital has analyzed the domestic fervor behind Indian stocks leading to high valuations. Another aspect to consider is the high amount of capital flowing through initial public offerings, including new stocks with almost no right to be publicly issued. Reading any Indian newspaper reveals dozens of IPOs hundreds of times oversubscribed, with many companies asking for simply $2M receiving bids for over $10M. A motorcycle dealership looking for $1.4M of funding is oversubscribed by 400x. 

While regulators and participants love the additional liquidity, why is this happening? And more importantly, what are the risks?

Reasoning

Domestic investors have been flipping their stocks to generate quick returns. According to SEBI’s analysis of 150 IPOs from 2021 to 2023, retail investors who invested less than $2,500 sold off 50% of their shares within a week of the IPO. High net worth investors, with investments over $2,500, sold off more than 60% during the same period. 

However, retail investors and high-net-worth individuals typically get between 25% and 50% of the shares in an IPO. More profitable companies tend to attract more retail investors. Surprisingly, some non-anchor-qualified institutional buyers, such as insurance, pension, and mutual funds, quickly sold 65% of their shares within a week, likely trying to liquidate the profit from the post-IPO pop, while hedging risk exposure. However, the overall sell-off from QIBs was just 20%. This lower figure is because anchor investors — QIBs that buy huge amounts of capital during an IPO and are required to hold it for a lock-up period, make up around half of all the shares allotted to QIBs (about 50%), while non-anchor QIBs held about 15%.

Furthermore, foreign investors have been leaving Indian equities in droves due to high valuations and choppy markets. That being said, they continue to invest in IPOs. Foreign investors have recently dumped $3.4B worth of Indian stock but have moved half of that capital to Indian IPOs, trying to capture the same run-ups as domestic investors.

Of course, regulation is also not concrete. Lock-up periods for anchors are 90 days at most, compared to 180 usually in the US. SEBI and NSE requirements are more modest compared to other markets: investors must only have a total NAV of at least $750,000, be in operation for at least 3 years, and have an average operating profit of $1.25M for 3 years.

Risks

Investors are participating in a ‘greater fools theory’ hoping that someone will scoop up their shares for more than they bought it for — this speculative strategy has investors essentially saying, “I may be a fool for buying this, but I am sure I can find a greater fool to buy it off me.”

Major investors and QIBs are playing hot potato with Indian stocks — despite being responsible for the insurance and pension payouts for hundreds of millions, these institutions comfortably buy and sell high-risk fast-growing shares lacking strong fundamentals to sell quickly after a quick pop. In particular, banks are selling 80% of shares within a week. Everyone wants in, but no one wants to be the last investor holding the stock if/when the bubble pops.

Macro

1 out of 5 working-age people on Earth will be Indian by 2030 (BBG)

• India needs 115 million new jobs by then, as per Natixis SA, an investment bank

• India currently faces a major underemployment crisis and is likely underreporting its unemployment rate

World experiences hottest summer ever, resulting in rise in heat-related deaths in India (BBG)

• India also likely undercounts heat-related deaths (PBS), due to incomplete reporting and misclassification of deaths

India must improve weather tracking to expand green infrastructure (BBG)

• Inability to track weather makes it hard to optimize renewable energy production (wind farms, hydroelectric power), which can strain grid

• Lack of data also makes it hard to optimize locations that wind farms and hydro plants should be built

• Adani Green Energy CEO Amit Singh says low weather data is to blame for India’s wind farms’ lackluster performance

Equities

India network builder Black Box expects revenue to triple with growing demand from U.S.

• Controlled by Essar Group, the network builder expects revenue to grow to $2 billion by 2028

• Black Box stock has doubled in past year, market cap now exceeds $1 billion

Adani Group to build $10 billion semiconductor plant outside Mumbai with an Israeli partner

• Production capacity to be 40,000 wafers (thin slices of semiconductor material that are used as the foundation for microelectronic devices) in the first phase, and 80,000 in the second.

Food deliverer Swiggy hires new talent ahead of next month’s IPO (ET)

• Swiggy hired Flipkart executive Dhruvish Thakkar as Assistant Vice President for revenue and growth at Swiggy Dineout

• Previously, Flipkart’s head of grocery Amitesh Jha was hired to be Swiggy Instamart’s CEO

SpiceJet convinced Carlyle Aviation to convert debt to equity (Reuters)

• India’s budget airline SpiceJet will adjust $137.68 million of obligations to the global private equity firm Carlyle Group’s aviation financing arm, to $97.51 million after waivers and settlements

• SpiceJet will issue $30 million of new shares to Carlyle

Alts

Sanlam, Africa’s largest insurer by market cap, eyes India expansion

• The insurer is planning to expand its partnership with Shriram Capital to offer wealth advisory services in the country

• “That’s a very hot area in India — everybody’s trying to get into it and we are very well positioned to start up,” said Sanlam CEO Paul Hanratty

• Blackrock inked a deal with Mukesh Ambani’s Jio to set up wealth management and brokerage services in the country in April

Politics

Anti-India protests heat up in Bangladesh, shortly after ousted PM Hasina finds refuge in India (BBG)

• New Delhi has promised to work with the new interim government headed by Nobel prize winner Muhammad Yunus

• Modi administration has yet to comment if Hasina will be extradited to Bangladesh to face trial, and how future India-Bangladesh relations may be affected

Oh, and in 1970, India launched the "White Revolution" to boost dairy production. This program successfully doubled the average milk output per person within a few years. Today, India is the world’s largest milk producer, partly due to its high cow population. Cows, which roam freely on streets and near homes, are culturally significant and considered sacred by the large Hindu population.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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