• IPOs stall, valuations to reset, alternative capital-raising methods considered
• Domestic appetite wanes while global investors re-evaluate India allocations
• Defence, renewables offer investment opportunities amid volatility

The outlook for India’s equity capital market has darkened significantly, with market participants expecting worries around the Middle East war to become worse before any possible rebound in sentiment, said multiple sources polled by this news service.

“Everything is on hold,” said one source, speaking about the pipeline of IPOs that have not yet launched.

The source added that major Indian ECM players, which usually launch about 25 to 30 large IPOs in a quarter, would be lucky to see even a handful sail through in the next quarter between, if uncertainty around the Middle East war continues.

Ravi Dharamshi, CIO and founder of ValueQuest Investment Advisors, added: “If we knew whether this war would last two weeks or two quarters, markets would find a bottom and stabilise. What is truly disconcerting is the not knowing — it is the unknowable unknown.”

This means corporates are expected to shy away from IPOs unless they absolutely have to list.

The first source said there are two exceptions: if a private equity fund is coming to the end of its life and needs to monetise assets, or if there is a genuine need to raise primary capital.

Valuation reset

Of the roughly 150 larger sized IPOs in the pipeline, only 20%, or about 20 to 30 companies, might fast-track other capital-raising methods including a sale, a dual track process, or private debt, said the first source.

Valuations will also have to reset as an earnings downgrade cycle begins. A second source said the Indian market is looking cheap at about 18 times one-year forward looking earnings – a level it hasn’t hit in a long time.

Dharamshi added that valuations are “genuinely attractive”, corporate balance sheets have deleveraged significantly and the earnings growth profile of Indian companies is a compelling one.

“For long-term investors, this confluence of reasonable valuations, stronger balance sheets, and a robust growth outlook makes this a good moment to build portfolios with a three-to-five year horizon,” he said.

However, the first source said companies have not revised their earnings guidance downwards yet.

Company earnings will be hit as freight costs spike, supply chains face disruption and commodity volatility intensifies. The impact of the war – even if it de-escalates in the next 10 days – will have far-reaching consequences on company revenues, profitability and valuations, he added.

Indian companies with exposure to the Middle East have already witnessed production cuts, cancelled orders and business disruptions, said the first and second source.

“The fear has spread beyond a shutdown of just labour and logistics,” said the first source. Entire businesses may have to shut down, he reckons.

Waning investor appetite

Domestic retail investors, typically exuberant supporters of Indian IPOs, are spooked by the market turmoil and are choosing to pick known names and blue chips, versus investing in IPOs, said sources.

Global investors have other concerns.

A third source, who works with sovereign wealth funds in the Middle East, said many funds from the region are relooking at allocations to India with the intention of deploying their capital locally as a show of solidarity in the war-torn region.

US funds, meanwhile, are facing up to pressure from the rupee-dollar exchange rate. The USD-INR exchange rate is at its highest ever, with USD 1 equalling INR 94 as of 23 March, compared to INR 86 a year ago, said the first source.

Another factor dragging down Indian markets is the recent resignation of Atanu Chakraborty, part-time chairman and independent director at HDFC Bank, one of India’s prominent banks and a national household name, said sources.

Chakraborty’s abrupt resignation on 18 March – where he cited “happenings and practices” within the bank that are “not in congruence” with his personal values and ethics – sent jitters to an already wary market, said the first and the second source.

The first source added that HDFC is recognised globally as one of the “gold standards” of Indian companies, so questions raised by Chakraborty’s resignation could have an impact on foreign investors eyeing Indian investments.

The bank’s stock has fallen 12% since the resignation was announced, in line with Indian markets.

India’s benchmark NIFTY 50 index has sunk 10% in the past month and is down about 13% year to date. Foreign investors have sold about USD 9.6bn in Indian equities since the war began, according to a media report.

Resilience amid fear

Amid this pain, market participants are turning to a handful of sectors that may hold up well.

The first source said sectors like defence, especially manufacturers of explosives and drones for which there is global demand, may stay resilient, or even witness a surge.

He added that shadow industries for energy transition, like renewables, storage and the EV ecosystem, are also likely to see robust growth.

Another sector which is having a moment are sports franchises – in particular, Indian Premier League (IPL) cricket teams, said the first source. Royal Challenger’s Bengal, which is owned by global beverage maker Diageo’s Indian arm United Spirits, and Rajasthan Royals have been reported about a month ago to be having talks with individual investors including funds such as KKR and Blackstone.

Dharamshi added that the rewiring of supply chains, energy sources and defence capabilities is creating enormous investment opportunity. Data centres, semiconductors, renewables, power infrastructure, and defence are where capital will flow, he said, adding that India is “exceptionally well-placed” to benefit from this shift.

Despite these flickers of hope, sources agree that the India market sentiment is one of fear and caution for now – with no real visibility on when a turnaround might happen.

“It’s not our war,” said Dharamshi, “but it is our problem.”