Will the Hyundai IPO Trigger a Stock Market Correction? Analysing What Historical Trends Suggest

Large initial public offers (IPOs) have historically had mixed effects on the Indian stock markets. Analyzing data from the last seven significant IPOs since 2007, we find that the Sensex has declined five times post-listing. These corrections can be attributed to a variety of factors, including rich market valuations, black swan events, and liquidity conditions.

The Reliance Power IPO Case

One prominent example is the Reliance Power IPO. The bidding for this Rs 11,563.20 crore book-built issue (price band of Rs 405 to Rs 450 per share) was open for subscription between January 15 and January 18, 2008. The IPO was heavily subscribed, with a subscription rate of 73.04 times. Specifically, the issue was subscribed 14.87 times in the retail category, 82.62 times in the qualified institutional bidders (QIB) category, and 190.02 times in the non-institutional investors (NII) category.

However, the shares of Reliance Power listed on February 11, 2008, and the subsequent market performance was severely impacted by the collapse of Lehman Brothers later that year. This black swan event triggered a 4.5% one-day drop in the Dow Jones Industrial Average (DJIA) and had a cascading effect on global financial markets, including India.

IPOs and Market Corrections

The pattern observed with Reliance Power has repeated with other major IPOs. Out of the last seven big IPOs since 2007, the Sensex lost ground five times post the stocks of these companies debuted. For instance, the LIC IPO in 2022 saw the Sensex fall by 5.4% in one month post-listing. Similarly, Paytm’s IPO in 2021 was followed by a 6.4% drop, and Coal India’s 2010 IPO resulted in a 4.4% decline in the Sensex. The SBI Cards IPO in March 2020 coincided with the onset of the Covid-19 pandemic, a black swan event that caused most global equity markets, including India, to sink.

Incoming Hyundai IPO

Hyundai Motor India’s proposed mega IPO, valued at over Rs 20,000 crore, raises questions about potential market impacts. Historical data suggests that the market may or may not correct post-IPO. However, several factors could mitigate this risk. The Indian market is currently flush with liquidity, supported by surplus cash with Domestic Institutional Investors (DIIs) and renewed buying interest from Foreign Institutional Investors (FIIs). Systematic Investment Plan (SIP) flows are robust, reaching nearly $2 billion monthly, compelling fund managers to invest these funds to avoid underperformance.

The reaction of the market to the Hyundai IPO will largely depend on the pricing and perceived business opportunity of the company. Unlike the over-hyped Reliance Power IPO, current regulatory frameworks ensure more justified valuations. The positive sentiment and liquidity comfort may also support the market. For instance, the market valuation at the time of the LIC, Paytm, and Nykaa IPOs was considered high, and these issues were aggressively priced. Once the market corrected, these stocks followed suit.

Conclusion

While history suggests that large IPOs often coincide with market corrections, the specific outcome of Hyundai Motor India’s IPO will depend on multiple factors, including pricing, investor sentiment, and overall liquidity in the market. Given the current strong liquidity conditions and the anticipated positive policies in the upcoming budget, the Hyundai IPO may not result in a market correction. The abundant liquidity and strong investor appetite for quality issues suggest that the market could remain buoyant post-IPO. Nonetheless, investors should remain cautious and consider the broader economic context and market conditions when making investment decisions.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.