The meltdown in the equity markets has taken its toll on the capital raising plans of Indian firms. Investment bankers estimate that at least 13 Indian companies have stalled plans of raising nearly Rs25,000 crore from the equity markets and say this could just be the beginning of the trend. “More and more companies that had announced plans to raise money are adopting a wait and watch policy,” said Girish Nadkarni, executive director, Avendus Capital, a domestic investment bank.
India’s bellwether stock market index, the Sensex, has dropped around 26% from its peak this year, eroding Rs19.5 trillion in market capitalization. There has been a 19% decline in equity capital market activity across Asian markets, between January and March, as indicated by public offerings, follow-on issues and equity-convertible issuances, according to Thomson Financial.
Most of the Indian firms that have scrapped their plans were planning qualified institutional placement (QIP)—a kind of private placement that listed companies can make to a set of institutional buyers such as banks, mutual funds, insurance companies, foreign investors and venture capital funds. Under Indian law, no single entity can be allotted more than 50% of a QIP issue. And the size of a QIP issue cannot exceed five times a firm’s net worth, the total of its equity capital and reserves.
Chief financial officers of some Indian firms think it is “suicidal” to make an equity offering at this juncture, and are willing to wait till the market sentiment improves. Investment bankers, however, said firms have begun to look for alternative sources of funding, such as going to private equity (PE) firms or raising debt instead of equity.
“We have dropped the plan for an initial public offering (IPO) for our cement unit for the time being. We are waiting for the markets to improve,” said Sajjan Bhajanka, managing director, Century Plyboards (I) Ltd. The group had planned an IPO for its cement unit, in which Century holds 70% stake, to raise Rs250 crore. The promoters have now asked their investment banker to look for PE funding instead.
Saroj K. Datta, executive director, Jet Airways India Ltd, says his firm is talking to merchant bankers to identify a “right time” for the firm’s capital raising effort. “We have taken some time to raise funds, considering the market meltdown. Nothing has been finalized yet,” Datta said.
Jet Airways had decided to raise capital of up to $800 million (Rs3,240 crore) through various ways, including a QIP issue and a rights offering.
A senior executive at the Essar Group, who did not want to be identified, said that the group is in “no immediate need of funds.” The group had said it would raise $3 billion to fund the expansion of its shipping and oil businesses.
While companies are willing to wait for the situation in the market to improve, investment bankers and credit rating agencies alike do not see this happening any time soon. If that comes to pass, firms will have to accept lower valuations than they had earlier envisaged for their issues, merchant bankers said. The other choice is to raise domestic debt or look for private equity funding. If companies do not opt for an alternative fund raising route, their long-term growth plans will be affected, bankers said.
While interest rates in the domestic debt market are “still under control” according to investment bankers, the costs of borrowing in international markets has shot up substantially. The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London inter-bank offered rate (Libor) to 400-500 basis points over Libor over the past six months, according to the estimates of bankers. One basis point is one hundredth of a percentage point. Libor is a benchmark base lending rate.
Bankers are advising firms against waiting for too long. S. Ramesh, CEO at Kotak Investment Banking, the investment banking arm of private sector bank Kotak Mahindra Bank Ltd, said: “Holding out for a while may be a temporary solution, but this will hurt their growth plans in the long term.”
According to Ramesh, in a situation where capital markets are volatile, it will be “challenging” for firms to go ahead with their equity issues. “Performances of Indian corporations have been on a decline for the last three quarters and added to this is the challenge of rising oil prices.”
Devesh Kumar, managing director, Centrum Capital Ltd, a Mumbai-based investment bank, said smaller Indian firms are the “worst affected” by the current market meltdown. “For instance, a company with a Rs20 crore turnover and market cap of Rs40 crore earlier had the potential to raise another Rs20 crore, but if its own market capitalization has fallen to Rs20 crore, the company is not in a position to raise any money now,” Kumar added. Centrum Capital focuses on mid-sized and small firms.
P.R. Sanjai and Ankur Relia contributed to this story.