High valuations leading to steady supply of paper, exit window open for PEs, promoters

Stake sales likely to remain strong.

India’s equity markets are flush with supply, and according to Kotak Institutional Equities, this is largely a function of one thing: high valuations. As prices stretch across sectors, shareholders from private equity funds, the government or even firm's promoters are choosing to take advantage of the lofty valuations and cash in.

As per Kotak's latest report, the current elevated market valuations, combined with shifting strategies of majority shareholders and fiscal pressures on the government, will keep the “paper” supply in both primary and secondary markets running high for the foreseeable future.

Recently,  private equity investors and promoters have offloaded sizeable stakes of their firms through IPOs, block deals and other secondary transactions. This sustained activity, the report noted, reflects the premium pricing across most sectors and stocks.

"We expect the supply of paper to stay at high levels as long as valuations remain high and retail investors through DIIs continue to make ‘fantastic’ offers in the market through their price-agnostic purchases at all price points," added the brokerage.

The government is also positioned to contribute meaningfully to this supply. With fiscal pressures rising and many PSU stocks trading at relatively high valuations, analysts argue that the Centre has room to step up divestments. The state holds more than 51 percent in several financial and non-financial PSUs, yet divestment targets have been missed repeatedly in recent years.

While higher RBI dividends helped offset weaker divestment receipts in FY2024-25, fiscal gaps may widen from FY2026-27 as GST rate cuts take effect, increasing the incentive for the government to monetize its holdings.

Even PE investors are likely to continue selling at the ‘right’ valuations, as it is a straightforward business proposition for them. "They hold substantial stakes in many listed companies, which will be sold eventually," noted the brokerage.

PE exits through IPOs and secondary offerings have already been substantial over the past few years. These transactions indicate that current market valuations offer attractive exit opportunities, and the industry is expected to continue monetizing positions as long as pricing remains favourable.

Promoters, too, are likely to participate in this trend. Both domestic and foreign promoters have increasingly been reducing their stakes through market and strategic transactions. Motivations vary but high valuations can make even long-held positions easier to part with, said the Kotak report.

Kotak added, "We wonder if promoters of Indian companies will increasingly treat their ownership in companies as investments and be willing to sell an even larger portion of their companies purely on commercial logic."