Ashish has authored a timely and insightful note “Let’s talk about supply too” (https://www.wealthforumtv.com/supply.pdf) which puts a spotlight on the relentless supply of stock in the market that is soaking up burgeoning demand from rising domestic inflows – to a point where it can potentially overwhelm the markets if this trend continues.
From April 2023, supply in the form of IPOs, FPOs and secondary market sales by promoters (including MNCs)and PEs has reached Rs.484,000 crs – that’s 1.6x times the domestic inflows from MFs, insurers and pension funds/EPFO. Planned supply for this quarter is already looking much larger than previous quarters – which cannot be good news for markets.
Out of the total supply of Rs.484,000 crs, 38% was from promoters (Indian and MNC) who have sold chunks of their promoter holding at rich valuations to retail and HNI investors – surely not a great signal. A further 23% was exits by PEs in the secondary markets – essentially transferring equity risk to individual investors at high valuations – again not a great signal.
A mere 16% was IPOs – of which less than 20% was for augmenting capital for capex programs. The largest portion was OFS – exits by existing investors to retail hands at these high valuations.
The notion that supply means IPOs which means new money raised for new projects which will fuel economic growth rings hollow when you see the kind of supply we have witnessed over the last 15 months.
Ashish also highlights that PE money in listed companies that is now completing its 3 year lock in is very substantial – expect a lot more of the same kind of supply in the coming quarters.
We will need much larger dollops of FII inflows to augment domestic inflows to soak up this supply – or we will need the supply tap to be turned down – which can only probably happen if markets correct. The history of many of our previous bull markets suggests that a deluge of supply marked the top of many cycles.
We need to look at supply just as closely as we monitor demand, to get a sense of whether market equilibrium is getting distorted by sharp imbalances.