Change is the only constant
We have written about the spate of Initial Public Offerings (IPOs) in India and our reasons for staying away from them, for the most part. This time, we want to talk about why new listings are important to keep the market vibrant and to keep the entrepreneurial spirit in the country alive.
In the last 18 months or so, India has witnessed more than 120 IPOs and follow-on offerings. This may seem like a maniacal pace, and indeed it is. However, this statistic absolutely pales in comparison to the five-year period from March 1992 to March 1997, during which an astounding 4,712 listings occurred — equivalent to nearly three IPOs every single day for five years!1
For reference, there are around 6,000 companies listed in India today.2 So, a not insignificant number of companies that we currently invest in owe their existence to the IPO boom in the ‘90s. For example, in 1992 a dynamic financial institution backed by the Asian Development Bank, called the Industrial Credit and Investment Corporation of India, listed in India. Over the years, this institution has morphed into ICICI Bank, currently the largest holding in our India strategy. Other top holdings which listed during that period are HDFC Bank (March 1995), Infosys (February 1993) and Godrej Industries (April 1993). Therefore, it would not surprise us if a few from the current crop of fresh listings become large investments for us in the future, despite our current misgivings about elevated valuations.
Over the past 20 years, nearly a thousand companies have listed in India and with them several sectors of the economy — hitherto inaccessible to public market participants — have opened up. Examples include sectors such as Insurance, Telecom, Modern Retail, Fast Food, Diagnostics, E-commerce, Food Delivery and several more, which did not exist in the Indian stock market 20 years ago. There are two positive effects of such a trend. Firstly, the stock market is then truly a barometer of the economy, rather than a crude imitation. We have seen, firsthand, that some emerging markets become stale, with a handful of sectors dominating the business landscape and investor returns. Secondly, the entrepreneurial drive to succeed is amplified when one witnesses the new cohort of managers/owners listing their businesses. Indeed, in top business schools and colleges across India, there is a welcome shift in mindset among students wherein entrepreneurship is respected, whereas just a decade ago, only the odd student would dare to step out of the well-established route of getting into a top corporate job.
Another change in the Indian stock market was the government’s decision, in 2018, to re-impose long-term capital gains taxes on investors. This might be old news but, as we point out, the effects are only being felt now. For one thing, as prudent operators, while we pay actuals, we do account for the tax on an accrued basis, providing for a sum that would become due were we to sell all our holdings tomorrow. This effectively depresses the Net Asset Value (NAV) of the strategy and as we come up to the 4th anniversary of this rule change, in a strong rising market, it has become noticeable as a substantial drag when one looks at relative numbers.
Plus ça change!
- Source: Prime Database. https://www.primedatabase.com/pub_demo.asp
- Source: Bloomberg
References to “we” or “us” are references to First Sentier Investors (FSI). The FSSA Investment Managers business forms part of First Sentier Investors, which is a global asset management business that is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group.
In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited (FSI HK) and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) (FSIS) whose company registration number is 196900420D. In Australia, this information has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM).
This document is directed at persons who are professional, sophisticated or wholesale clients and has not been prepared for and is not intended for persons who are retail clients. The information herein is for information purposes only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Some of the funds mentioned herein are not authorised for offer/sale to the public in certain jurisdiction. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
Any opinions expressed in this material are the opinions of the individual authors at the time of publication only and are subject to change without notice. Such opinions: (i) are not a recommendation to hold, purchase or sell a particular financial product; (ii) may not include all of the information needed to make an investment decision in relation to such a financial product; and (iii) may substantially differ from other individuals within First Sentier Investors.
Please refer to the relevant offering documents in relation to any funds mentioned in this material for details, including the risk factors and information on requirements relating to investor eligibility before making a decision about investing in such funds. The offering document is available from First Sentier Investors and FSI on its website and should be considered before any investment decision in relation to any such funds.
Neither MUFG, FSI HK, FSIS, FSI AIM nor any of affiliates thereof guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investment in funds referred to herein are not deposits or other liabilities of MUFG, FSI HK, FSIS, FSI or affiliates thereof and are subject to investment risk, including loss of income and capital invested.
To the extent permitted by law, no liability is accepted by MUFG, FSI HK, FSIS, FSI AIM nor any of their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that we believe to be accurate and reliable, however neither the MUFG, FSI HK, FSIS, FSI AIM nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of FSI.
Any performance information has been calculated using exit prices after taking into account all ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.
Copyright © First Sentier Investors (Australia) Services Pty Limited 2021
All rights reserved.