Mumbai: Riding high on liquidity, the primary market is expected to thrive in 2010.
At least 63 firms have filed draft offer documents with capital market regulator Securities and Exchange Board of India (Sebi) to raise nearly Rs40,000 crore through public floats. Besides, at least 100 listed firms have announced plans to raise Rs1 trillion through placements with qualified institutional investors (QIPs), according to Prithvi Haldea, chairman and managing director, Prime Database, a Delhi-based primary market tracker.
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Then, there are at least 31 listed firms that want to raise money through rights issues.
Finally, the government is set to kick off its disinvestment programme with follow-on public offers (FPOs) of a few listed public sector units including NTPC Ltd, National Mining Development Corp. Ltd (NMDC) and Sutlej Jal Vidyut Nigam Ltd.
In NTPC, the government is divesting a 5% stake to collect Rs11,000 crore. An 8.38% divestment in NMDC, at its current market price, could fetch the government around Rs14,000 crore.
This will be followed by initial public offerings (IPOs) of Bharat Sanchar Nigam Ltd and RITES Ltd and an FPO for Steel Authority of India Ltd.
The government has already raised Rs4,260 crore this fiscal through the divestment of minority stakes in NHPC Ltd and Oil India Ltd, but the plan will gain momentum in 2010.
There will be a flood of issues in the primary market next year but investment bankers, who market these issues, do not see any adverse impact.
“Abundant global liquidity, coupled with earnings momentum and the continuing emerging markets growth story make Indian equities a compelling investment destination,” said Tarun Kataria, managing director and head of global banking and markets of HSBC Holdings Plc’s India unit.
Most of the activity will be seen in the beginning of the year, said S. Ramesh, chief operating officer, Kotak Mahindra Capital Co. Ltd, the investment banking arm of Kotak Mahindra Bank Ltd.
“We expect to continue to see robust capital market activity in the early part of 2010 in the form of disinvestment programme of the government, IPOs, and QIPs,” he said.
A. Murugappan, executive director, ICICI Securities Ltd, the investment wing of ICICI Bank Ltd, India’s largest private sector lender, agreed.
“Primary markets will be buoyant, led by the government disinvestment programme,” he said. “This will also pump up fund-raising activity by the private sector.”
Many believe that quality government paper will absorb liquidity and bring back valuations to a reasonable level.
“There is tremendous liquidity in the market now, which requires some big IPOs to absorb,” said Ajay Parmar, head of research-institutional, Emkay Global Financial Services Ltd. “Otherwise, the money will chase the same stocks, leading to severe overvaluation.”
The Sensex, India’s benchmark stock index, is currently trading at a price-earnings multiple of around 22 times against its historic average of 13.8 times.
Experts say a stable secondary market and comfortable liquidity will help companies raise money with greater ease next year than what was seen in 2009.
“The success of these primary market issuances will depend on the stability and buoyancy of secondary markets,” said Haldea of Prime Database. “There is no lack of liquidity, so good papers will be bought.”
In the fag end of 2007, the Sensex rallied from 17,000 to 21,000 in three months, before the crash in 2008 when an unprecedented credit crunch gripped the global markets in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. Foreign institutional investors (FIIs), the main driver of Indian market, sold equities en masse as they needed to send money home.
Haldea doesn’t foresee the frenzy of 2007 being repeated next year. According to him, there will be more IPOs but the subscription level will not match that of the year before last.
In 2007, when the Sensex rose 47.15%, 100 firms raised Rs34,179.11 crore. In 2008, when the markets fell 52.45%, 37 firms garnered about half that amount—Rs16,904.42 crore—through such issues. This year, the Sensex has risen 80% and 20 companies have offered shares worth Rs19,400 crore through IPOs.
According to Kataria of HSBC, the market is fairly valued in the near term. “But I believe earnings will exceed multiples in the months ahead driving the market higher.”
Abhay Bhalerao, director, Equirus Capital Pvt. Ltd, a boutique investment bank, continues to see opportunities “but they will come with their own challenges. It’s going to be cautious optimism in 2010.”
With most of the global central banks still not in any hurry to raise interest rates and exit the loose monetary policy regime, bankers expect the liquidity situation to remain comfortable at least till the end of 2010.
The year of QIPs
As the economy started pulling out of the slump, cash-strapped Indian firms chose to raise money through the QIP route this year. Unitech Ltd, India’s second largest real estate firm in terms of market value, took the lead to raise Rs1,621.1 crore through a QIP in March and other firms, mostly in the realty sector, quickly followed suit to meet working capital needs. Overall, 48 QIPs raised Rs33,780.77 crore in 2009.
QIPs, in which promoters of listed entities issue shares to institutional buyers without involving the retail investor, had suffered a setback in 2008. Funds raised by this route amounted to Rs3,586.45 crore in 2008, around 80% drop from Rs23,338 crore in 2007, according to Prime Database.
Unlike public offers, QIPs do not require any offer document or regulatory clearances and hence money can be raised quickly.
Sebi last year changed pricing norms to allow firms to base the floor price for QIPs on the average price of the preceding two weeks, against the six-month average previously.
In a bid to boost the primary market, the regulator has also extended the validity of IPO applications from three months to one year. This means that a firm can now wait for up to a year after getting Sebi’s nod for appropriate market conditions before floating its IPO.
In yet another policy change to encourage firms to raise money through the primary market, Sebi has allowed allocation of up to 30% shares in a public issue to anchor investors. An IPO with an anchor investor indicates that the company enjoys good reputation and its public offer could be a success. Indeed, such norms have given impetus to primary issues but, at the same time, offered a larger play to institutional investors. Retail investors are still staying away from IPOs.
“Even though the IPO market appeared to stage a comeback…subscription levels at the time of IPOs were heavily skewed towards QIBs (qualified institutional buyers), said Jagannadham Thunuguntla, equity head of Delhi-based brokerage SMC Capitals Ltd. “While the response from HNIs (high networth individuals) was moderate, the response from retail investors was muted.”
Sebi, on its part, has been trying to make public floats attractive for retail investors. For instance, it recently said retail investors, for whom 30% of public floats are set aside, will get shares in book-built FPOs at the floor price, while institutional investors will have to pay more. In the book building process, a public issue has a price band and investors are required to make bids within the range.
Sebi has also allowed smaller firms to raise capital through fast-track FPOs by reducing the market cap threshold from Rs10,000 crore to Rs5,000 crore.
A Mint analysis of subscriptions to IPOs in the past three years suggests that retail subscription, which used to hover at 50-100 times in some issues in 2007 and 2008, has come down to one to three times this year.
According to Haldea of Prime Database, the confidence of retail investors continues to be low. Most of the retail investors who lost money when markets tumbled in 2008 are yet to see profits on their 2007 investments and are not willing to take fresh bets.
Also, most of the IPOs in 2009 were listed at a discount to their issue prices, leaving nothing on the table for retail investors. They will get back their appetite for IPOs only after a few public issues get listed at a premium. The broking community hopes that quality government paper will do the trick.
Graphics by Sandeep Bhatnagar/Mint