India’s stock market is coming down to earth and, along with it, the dreams of companies that planned big market flotations to raise funds for projects that are yet to happen. Emaar MGF Land, a real estate joint venture 42% owned by Emaar of Dubai, decided on February 8 to pull its float, which had originally been expected to raise nearly $2 billion, because of “adverse” market conditions. A day earlier, Wockhardt Hospitals, a leading healthcare company, pulled a smaller float.
The trend was underlined this morning when Reliance Power, which raised $3 billion last month in the country’s biggest ever initial public offering (IPO), listed on the markets. During the day, it dropped as low as 21% below the Rs450 issue price and closed 17.2% down at Rs372.50. That was a marked reversal of analysts’ talk a short time ago of it hitting Rs900 or at least Rs550-600.
Reliance’s debut helped to pull shares overall down by 4.78% to the lowest level in nearly three weeks. The Bombay Stock Exchange’s key 30-share Sensex fell to 16,630.91, its lowest close since January 22, and 21.6% below its record 21,206.77 on January 10.
Reliance – which is part of Anil Dhirubhai Ambani Group (ADAG) and is controlled by Anil Ambani, one of India’s richest businessmen – mobilized bids totaling an astronomic $180 billion last month for its IPO, even though it has yet to produce a revenue stream. The future of the company – and the stock – depends on Ambani’s ability to turn plans for 13 power projects totalling 28,200MW into reality.
The company drained so much money out of the stock market last month that it helped to trigger the slide at a time when the market was being buffeted by downward trends internationally. So the irony is that Reliance’s own poor performance today was triggered by its almost unreal success last month.
The link between the Reliance and Emaar flotations is that both are built on dreams for the future. Just as Reliance had to admit in its prospectus that “we cannot assure you that our power projects will commence operations as expected”, so Emaar’s prospectus admitted that “most of our projects are in the preliminary stages of planning and require approvals or permits.” The prospectus added that 83% of the land required was still zoned as agricultural – a problem that will also hit Reliance’s projects.
Anyone who knows anything about industrial and infrastructure development in India knows that substantial resistance is building up against rezoning agricultural land, and the country has an appalling history on planned power projects. So it is scarcely surprising that both companies have been hit now in the current international market gloom.
India’s fundamentals are still strong, even though economic growth forecasts are down below 9%. Investors are looking for comfort to the Budget that Palaniappan Chidambaram, the finance minister, will deliver on February 28. When Reliance hit its high spot last month, he said that “investors are investing in the future of India.” He was right of course, though they are now more choosy than they were a month ago.
And, as I wrote in my last post on this subject, many market professionals seem almost relieved the Sensex has fallen from the “absurd overvaluations” of its peak and that dreams are now being questioned.