Mumbai: Encouraged by rising stock markets and predictions by economists and analysts that the worst is behind the economy, Indian firms are firming up plans to raise money from the capital market, say investment bankers. According to their estimates, the companies could be looking to raise $6-9 billion (Rs29,700-44,550 crore) from the equity market in the next few months.
Gaining ground: Since 9 March, BSE’s Sensex has gained 48.48%. Primary markets dried up last year as Indian stock markets slumped after a five-year bull run that ended in January 2008. Bloomberg
The firms are planning to raise money through various ways. While some of the listed companies want to raise funds through so-called qualified institutional placements (QIPs), others are contemplating rights issue, and still others, both listed and unlisted firms, are considering private placement of equities or initial public offerings (IPOs). In QIPs, promoters of firms issue shares to institutional buyers and retail investors are not involved.
“Companies are starting to think about raising money from capital markets,” said Ranu Vohra, managing director and chief executive of local investment bank Avendus Capital Pvt. Ltd. “Clearly the markets have seen a partial resurgence and companies that show initial interest will follow with at least a draft prospectus.” A company planning to enter the market is required to file a draft prospectus with the capital market regulator, Securities and Exchange Board of India (Sebi), at the first stage.
After falling 52% in 2008, the Sensex, the Bombay Stock Exchange’s bellwether equity index, has risen 25.6% this year.
Since 9 March, the start of the current rally, which some investment gurus such as Mark Mobius of Templeton Asset Management Ltd and Anthony Bolton of Fidelity International term as the next bull run, the Sensex has gained 48.48%, the most among emerging markets. It index gained 1.37%, or 164.19 points, at 12,116.94 on Thursday.
Vohra sees companies raising about Rs40,000-45,000 crore this year, including a potential Rs20,000 crore rights issue (the sale of shares to existing shareholders) by State Bank of India, the country’s largest lender by assets.
According to a 6 May report from the local research arm of the Credit Suisse Group, Indian firms are planning to raise at least $6 billion in the next few months. This includes a $1 billion equity issuance by Tata Steel Ltd. Besides, Jaiprakash Associates Ltd is raising some $600 million mainly through non-convertible debentures and Indiabulls Real Estate Ltd another $600 million, through QIPs.
The Credit Suisse estimate also includes about $325 million raised by real estate company Unitech Ltd three weeks ago and a revival in the share sale plans among Adani Power Ltd, National Hydro Power Corp. Ltd and Oil India Ltd.
The primary markets dried up last year as the Indian stock markets slumped after a five-year bull run that ended in January 2008 after the benchmark index hit its lifetime high of 21,206.77. As the global financial system sought to deal with a mess involving toxic debt and overleveraged institutions, at least 60 Indian companies deferred their share sale plans after filing offer documents with Sebi.
According to Bloomberg data, 34 Indian companies raised Rs18,300 crore through IPOs in 2008, a 45.96% drop from the Rs33,800 crore raised from 89 IPOs in 2007.
Of the Rs18,300 crore, the IPO of Reliance Power Ltd, the Reliance-Anil Dhirubhai Ambani Group company, alone accounted for Rs10,100 crore.
Money raised through QIPs too fell. Funds raised through this route dropped 83.26% to Rs3,700 crore in 2008, from Rs22,100 crore in 2007.
Even though data on exports and industrial production remain negative, there has been a dramatic improvement in sentiment, with lead indicators such as money supply, bank credit, foreign exchange reserves, foreign fund inflows and companies’ inventories showing a positive trend. Lead indicators catch the trend early while industrial production data coincides with actual consumption.
Local auto and cement sales are improving. The purchasing managers’ index, which comes ahead of official industrial production data, points to an improvement in manufacturing in April, prompting some institutions such as Swiss investment bank UBS AG to predict a turnaround as early as June. Even the normally bearish research arm of Morgan Stanley wrote in a 1 May report that it expects “GDP (gross domestic product) growth to start recovering in June-July 2009.”
“The secondary market is a lead indicator,” said S. Subramanian, head of investment banking at Enam Financial Consultants Pvt. Ltd. “The recent rally has brought some cheers to investors and companies in terms of valuations.”
To be sure, the time taken from considering an IPO to executing is considerable and firms are still wary about the sustainability of the current rally. Indeed, Enam’s Subramanian and others such as Prithvi Haldea, chairman and managing director of Praxis Consulting and Information Services Pvt. Ltd, which runs Prime Database, a primary market tracker, said it is too early to predict whether companies would follow through with their plans.
“Because of the (stock market) buoyancy, people have woken up,” said Haldea. “But they have to get some sense of stability and sustainability, and will not take decisions unless the new government is formed.”
Elections to India’s Parliament are on currently and a new government is likely to be in place by the end of this month. With a fractured mandate seeming more likely, analysts are concerned that a weak government will be able to do very little on the economic policy front.
Still, companies are planning equity issues as banks are not willing to offer them cheap money despite a very sharp drop in the policy rate of India’s central bank. Commercial banks fear that if they become liberal in offering cheap loans, they may run the risk of adding stressed assets, or bad loans, to their books.