India Breaks Record With $3.3 Billion Listing, But ETFs Offer a Safer Route

India’s largest-ever initial public offering is off to a less-than-illustrious start on Tuesday, with shares in Hyundai Motor India stumbling as much as 6.0% out of the gate.

The Indian subsidiary of the Korean car company listed its shares at 1,960 rupees. They’re trading at 1,844 rupees in afternoon trade at the time of this writing, down 4.7% and just off their low for the day of 1,842 per share.

There had been indications that the stock would likely slip due to trade in the “gray market” prior to the actual IPO on Tuesday. In pre-listing trade, the shares were trading at a premium of as high as 1,000 rupees per share two weeks ago. But last week, that premium had narrowed to just 60 rupees, essentially flat.

In gray-market trade, which is unregulated, investors enter into their own informal contracts to trade shares at a set price, before they debut.

The company has raised $3.3 billion, the largest stock debut in Indian history. It values the Indian subsidiary at a market capitalization of $18.2 billion.

This IPO exceeds the 2022 debut of the state-backed insurer Life Insurance Corporation of India (NSE:LIFI), which raised $2.7 billion and has been the largest IPO before this. India’s roaring stock markets were the site of some 100 new listings in the September quarter, but the market is very momentum-driven.

That’s much like the Chinese market, where retail traders can account for two-thirds of the volume. Indian equities have stolen the limelight from China plays until the stimulus-driven boom that began in China on September 24. But, while Chinese stocks remain above their September levels, that rally has lost its way, given the lack of detail and hard numbers surrounding Beijing’s plans to spark the economy back to life.

There are no such concerns in India, the fastest-growing major economy in the world. GDP looks set to grow 7.0% this year, well above the average for Asia and emerging markets, which is 4.4% in both cases. It is likely to maintain a similar pace for the next couple of years, too.

A consumer play like Hyundai Motor India offers a way to tap that growth. The Indian subsidiary is the second-largest carmaker in India, behind only small-car specialist Maruti Suzuki (NSE:MARUTI), and just ahead of Tata Motors TTM (NSE:TAMO) and Mahindra & Mahindra MAHDY (NSE:MAHM).

I would caution against individual Indian stocks, however. There are concerns over corporate governance, even among India’s largest companies, as the short-selling attack on the Adani Group that began last year has demonstrated. After India’s stock watchdog began investigating not Adani but instead the short seller, Hindenburg Research, Hindenburg lashed back to accuse the head of the watchdog, Madhabit Puri Buch, of having links to offshore funds controlled by Adani. Both Buch and Adani deny any wrongdoing.

Exchange-traded funds (ETFs) are the safest, simplest route. You are spared single-stock risk, in what is anything but a transparent market.

The iShares MSCI India ETF INDA is the elephant in the Indian equity room, with $11 billion under management, which is posting a 15.9% gain year to date.

It is more than double the size of the second-largest ETF, the WisdomTree India Earnings Fund EPI. It screens only for companies that offer shares to international investors. So companies have to be profitable, as well as significantly large enough to ensure non-Indian investors can buy the stock in India.

The VanEck India Growth Leaders ETF GLIN is also interesting. Both WisdomTree and VanEck use “smarter” indexes to earn their keep, with the VanEck product tracking the MarketGrader India All-Cap Growth Leaders Index. That isolates 80 “fundamentally sound” Indian companies, with a free-float market-cap weighting that’s capped at 5% for any particular holding, to avoid an overallocation to any particular entity.

Further strikes against the car industry in India right now are persistent inflation as well as worries over high oil prices due to the conflict in the Middle East. Institutional buyers have been the main advocates of the Hyundai Motor India IPO, the first listing for the Hyundai group outside its home market.

At the time of publication, McMillan had no positions in any securities mentioned.