IPO flow preventing bubble valuations in mkts: Mark Mobius

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 10/02/12 Are Mutual Funds betting on Nifty?

In an interview with CNBC-TV18, Mark Mobius, Managing Director of Temptation Asset Management, spoke about his reading on IPOs (initial public offerings).

Below is a verbatim transcript of an exclusive interview with Mark Mobius on CNBC-TV18. Also watch the accompanying video:

Q: What do you see between now and Q1 of 2010 because that is a tricky period. The Fed is saying is that don't expect rate tightening anytime soon but a lot of people are saying that maybe in Q1 you will get the first signs of tightening of the loose monetary policy that will coincide with a lot of turbulence in the market?

A: Yes, as soon as we see any sign of inflation, there will be concerns. I believe that a more important aspect of this whole situation as regards to stock markets is that the pipeline for initial public offerings (IPOs) has now grown to very large proportions and this will tend to put a damp on the stock prices in every market. The IPOs up to now have been quite profitable for people who have gone in. On the average, they have made anywhere between 12% and 15%. So that is going to have a bigger impact on the markets than other concerns about inflation coming up.

Q: We are seeing a flood of IPOs being lined up from private companies and even the government even in India and China has had a spate of them as well. Are you saying that this could end up stifling the market?

A: This will have an impact on the market because you are talking about billions of dollars waiting to be raised. This is not only in the equity markets but also in the debt markets. When we go and talk to companies here in India and other parts of the world, invariably when we ask them if they are expecting to raise money, they say, "Yes, we think it is a good idea to raise money", and then the second question we ask them is do they need this money and many of them answered, "No, we don't need it. Our balance sheets are strong but just in case we want to have a stronger balance sheet and also we would like to do some purchasing of other companies, we would like to do some merger and acquisition (M&A)". So, according to me, the trend will continue and till such time is the appetite for these IPOs wanes and we will begin to see some concerns, some of the IPOs have not been that successful. However, I think the lineup and the waiting line is very long.

Q: In India particularly many of the initial public offerings (IPOs) have not been successful at all. This 12-15% that you spoke about is probably one isolated instance, rest of them are all under water at this point of time. Do you think they are being aggressively priced?

A: Some of these IPOs are too aggressively priced. Particularly in the view our analysts have regarded the market. I am talking about the pessimistic view. So I think many of these IPOs are going to have to be re-priced as we go forward. We have seen a number of IPO prices come down even before they begin to think about going to the market.

Q: The counter argument to that is that this kind of supply of paper might actually lead to the market not blowing out as it did in the end of 2007. Maybe the secondary market prices will be somewhat more muted and not go into ballistic valuation range which is not bad.

A: I think it is a very good thing. This IPO activity has a tempering effect on the markets which is very positive. So I am certainly not against it. It does not mean that I am going to go after these IPOs that are expensively priced but definitely it is a tempering mechanism.

Q: The Indian government said that it will want to list many of the unlisted public sector units and may also do small stake sells in the existing ones. How do you read that from a market perspective?

A: These issues can be very big and India is not the only case. There are other cases around the world where government is thinking of listing some of the state owned enterprises. India is one of the biggest but China also is very big in that regard. So there is a long lineup. In the case of China, the government has been very cautious in allowing too many IPOs to come to the market. However, there are enough there to fill the pipeline. I believe we are going to see more and more of that as we go around the world and visit companies in Brazil and Russia so forth. In Russia the desire for IPOs is more important because they have big debt problems and they have to raise more money by either debt or equity. However, in case of India and China many of these companies don't need that extra money.