The pace of equity supply may be the key reason the market has become susceptible to volatility in foreign flows, said a senior official of a large mutual fund.
Supply of equity in the form of initial public offerings (IPOs), qualified institutional placements (QIPs) and stake sale since FY24 has been 1.5x times the net inflow into mutual funds, according to a note by Ashish Gupta, CIO of Axis Mutual Fund.
The impact of this on market direction was masked as FPI flows over 18 months through September 2024 had been positive at over $35 billion. These aided in absorbing the increased supply, he said. Over 40 per cent of the IPOs/QIPs raised during this period were subscribed by foreign inflows.
The IPO pipeline for the second half is nearly 3x the amount raised in the first half with 91 companies looking to list and in aggregate raise $17 bn. Another 70 listed companies in recent weeks have taken board approvals to raise in aggregate $16 bn of equity through QIPs. Secondary stake sales from promoters and private equity is also only likely to grow larger given the expiring lock-ins and elevated trading multiples in the market.
Vagaries of foreign flows
Assuming secondary sales (by promoters and PEs) at $22 bn in 2H stays similar to what we have seen in first half, the total supply will rise to $55 billion in the second half of the year or about 2.5x the estimated inflows in MFs. This may lead to a situation where equity supply will overwhelm domestic fund flows and market direction will again be subject to vagaries of foreign flows, according to Gupta.
Strong domestic flows had proved to be an adequate counterfoil for foreign flows all through FY22 and FY23, according to Gupta. In FY22, FPI outflows stood at $18.5 bn while FY23 saw $5 billion of outflows. However, markets registered a 18 per cent upmove in these two years despite the foreign selling as mutual funds saw $53 bn of inflows and were able to absorb the outflows.