Recovery in the primary market nowhere in sight

Recovery in the primary market nowhere in sight
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First Published: Sun, Jun 29 2008. 11 43 PM IST

Updated: Sun, Jun 29 2008. 11 43 PM IST
India’s primary market for equities has seen its worst quarter in at least 18, that is since January-March, 2004. Companies raised only Rs1,200 crore worth funds from initial public offerings (IPOs), follow-on offerings, rights issues and qualified institutional placements in the April-June quarter, Bloomberg League Tables data show. In the January-March quarter, funds worth Rs38,000 crore were raised through such offerings.
Overseas issuances of foreign currency convertible bonds (FCCBs) and depository receipts dwindled to $39 million (Rs170 crore) last quarter, from $596 million in January-March.
Overseas issuances, too, were the lowest in the last 18 quarters. Fund raising has been affected during past market corrections as well.
After the drop in the secondary markets in May 2004 and May 2006, equity and equity-linked issuances dropped in the following (July-September) quarters in those years (see chart). But it’s the first time the primary market has almost dried up since the boom in new issuances since 2004. Ever since Emaar MGF Land Ltd and Wockhardt Hospitals Ltd withdrew their IPOs earlier this year, there have been hardly any noteworthy offerings. With the markets hitting new lows now, a recovery in the market for equity issuances is nowhere in sight. While some large rights issues (from Tata Motors Ltd and Hindalco Ltd) are expected to hit the market later this year, these will have to be priced substantially below the ruling market price if current conditions prevail.
In the rest of Asia, too, issuances fell, but hardly as much as in India. Equity and equity-linked offerings raised about $15 billion last quarter, down from $18 billion in the March quarter. Funds raised in the last two quarters represent a large drop from an average of over $45 billion in the preceding three quarters, but some large convertible issuances continue to take place.
Global equity issuances nearly doubled last quarter compared with the March quarter, as large financial institutions such as Royal Bank of Scotland, UBS AG and Lehman Brothers Holdings Inc. issued equity to bolster capital.
From the perspective of investment bankers in India, merger and acquisition activity continues to be high, and so the drop in fees on account of equity issuances is somewhat made up. But for Indian companies that need to fund these deals and other capital expenditure plans, it’s imperative that the primary market recovers soon, especially with the debt option becoming increasingly expensive.
Jet Airways: battling multiple headwinds
Almost every time it reports quarterly results, Jet Airways Ltd breaks some record or the other. The loss it reported recently was the first time ever that expenses had exceeded revenues in the January-March quarter. After the festive period in the December quarter, the fourth quarter of the year is usually among the best for the company.
But fuel prices have soared and with domestic carriers having added capacity recklessly in the past few years, it has become increasingly difficult to recover costs. The problem, however, is that the worst is yet to come. Fuel prices have risen nearly 50% since end-March and there are no signs of rationalization of capacity.
Last year, after Jet took over Sahara and Kingfisher Airlines bought Deccan Aviation, investors were hopeful that the consolidation in the industry would lead to higher yields and lower capacity addition.
Shares of Jet Airways had risen as much 60% in 2007 as a result. But according to Jet’s estimates, the extent of oversupply or imbalance in the domestic market is still around 20%. What’s more, the recent increase in air fares is expected to hit demand and the imbalance may only worsen.
Jet estimates that the industry’s losses will double to $2 billion (Rs8,580 crore) in 2008-09 if the current trend continues. In a post-results note, Citigroup Research has estimated that losses will extend to FY10 as well. It had earlier estimated that Jet would return to profit in FY10, but now expects losses in the coming two years to be as high as Rs2,000 crore. Excluding gains from the sale and leaseback of aircraft, Jet’s losses last fiscal stood at Rs727 crore.
Jet’s woes are compounded because of a stretched balance sheet, which makes it imperative that it raises equity funds quickly. Given the state the markets are in, the dilution in its equity would now be higher than earlier anticipated. Also, its acquisition of Sahara last year is just adding on to losses and making the need for funding even more urgent. Sahara posted losses of Rs440 crore last year. With so many headwinds, it’s no wonder the company’s shares hit an all-time low after the results were announced.
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First Published: Sun, Jun 29 2008. 11 43 PM IST