Proceeds from fresh issues (IPOs) by Indian companies surpassed even the levels seen in the go-go days of 2007. Also, the government has made a strong mark as a mega capital raiser, with the string of IPOs and FPOs in public sector companies this calendar.
From another perspective, the high ‘confidence level' may well be a case of Indian corporates making hay when the sun shines. The ‘year of equity capital raising' coinciding with the ‘year of the resurgent Sensex', therefore, does not come as a surprise. That a buoyant market usually coincides with mega fund-raising (after all, it helps a company get the best bang for its buck) seems to be corroborated by the market and fund-raising data over the past five years (see Table). Going forward, if the markets continue to remain strong, the fund-raising drive can be expected to continue. The mandatory 25 per cent public shareholding norm in listed companies could also keep the counters ticking.
However, potential investors need to be wary of the rather high dilution in equity in many of these cases of fund-raising. For instance, in more than half the non-IPO issues this calendar, equity dilution from 2009 end has been more than 20 per cent. If earnings do not keep pace, shareholders may be looking at value erosion.
IPO surge
Proceeds from initial public offerings so far in 2010 have grown more than 90 per cent over the amount raised from such offerings in 2009. At Rs 36,700 crore (and counting), the IPO proceeds in 2010 have already exceeded the previous high of Rs 33,800 crore raised in 2007.
In fact, the IPOs of companies such as Coal India and MOIL were oversubscribed many times, attesting to what seems to be a returning appetite among the investor community for well-priced, fundamentally good companies.
Besides improving market sentiment, a major contributor to the surge in IPOs this calendar has been the increased thrust towards divestment in PSU stocks by the government, in an effort to bridge the fiscal deficit.
This has seen five IPOs (including the behemoth Rs 15,500 crore Coal India offer) in PSU companies in 2010.
Among the private sector players, Jaypee Infratech (Rs 2,300 crore), SKS Microfinance (Rs 1,600 crore), and a clutch of real estate players — DB Realty, Prestige Estates, and Oberoi Realty (Rs 1,000-1,500 crore) — came up with the largest IPOs this year. The fresh issues of 2010 currently contribute to more than 4 per cent of the market capitalisation of the BSE.
The big-ticket nature of several IPOs this calendar ensured that despite a fewer number of these issues (61) in 2010, compared with the 89 in 2007, proceeds have been higher than that in 2007. However, the average IPO size in 2010 (Rs 600 crore) was lower than that in 2009 (Rs 950 crore).
Inevitably, not all these fresh listings lived up to investor expectations. As many as 37 of these 61 IPOs today trade at less than issue price, and have underperformed the broader market, underlining the need for potential investors to be selective in their IPO choices.
Follow-on offers shine
Among the biggest contributors to the equity capital flows in 2010 were the follow-on public offers by public sector companies. The FPOs of NTPC, NMDC, Power Grid, REC, SCI and Engineers India raised a mammoth Rs 31,600 crore.
These six offers, along with the five IPOs in PSU companies, helped the government and the PSU companies raise more than Rs 49,700 crore in 2010, compared with Rs 8,800 crore in 2009 and a meagre Rs 1,600 crore in 2008 from similar issues.
For investors though, FPOs were a mixed bag with only three of the six issues trading above issue price, and outperforming the broader markets.
QIP going strong
Since the introduction of the qualified institutional placement (QIP) mechanism in 2006, the instrument has been gaining in popularity in Corporate India, thanks to less cumbersome procedures. Save in 2008, when both the number of and proceeds from QIPs registered a sharp dip due to turbulent market conditions, Indian corporates used the QIP route extensively to augment their equity capital. In 2010, more than Rs 25,600 crore was raised from around 54 QIP issues.
Major issuers include Adani Enterprises (Rs 4,000 crore), Tata Motors (Rs 3,400 crore), and IDFC Limited (Rs 2,700 crore).
QIP proceeds in 2010 were, however, less than the peak of Rs 34,100 crore raised from 51 such issues in 2009. At that time, amidst only a nascent recovery in market sentiment, there was a lot of pent-up demand for fresh capital from private companies, especially in the real estate sector, after the difficult period in 2008 and early 2009.
So, while in 2009, the real estate sector was the major issuer of QIPs, the script was different in 2010, with there being no specific sector bias. Among others, diversified conglomerates, auto manufacturers, and financial service providers including banks lead the QIP pack this calendar.
The usage of the QIP funds has varied across companies. So, while Tata Motors used the funds mainly to de-leverage its balance-sheet, Shopper's Stop planned to use its QIP proceeds for expansion. Kalpataru Power Transmission, on the other hand, planned to mainly invest the proceeds in its subsidiary. Though companies seem to have benefited from the issues, from the point of view of the institutional investors though, the pricing of the QIPs in 2010 seems to have left little on the table. Eight out of 10 companies checked are trading below the issue price.
Gaining Rights
Proceeds from rights issues in 2010 (Rs 9,100 crore) was up almost 1.5 times over that in 2009. However, it was still significantly lesser than the Rs 29,700 crore raised in 2008, when mega rights offers from SBI (Rs 16,700 crore) among others shored up proceeds.
Major issuers of rights shares in 2010 include Religare Enterprises (Rs 1,800 crore), Adani Enterprises (Rs 1,500 crore) and Suzlon Energy (Rs 1,300 crore).
The other major contribution in the domestic equity capital pie came from the sale of treasury stock by Reliance Industries, which raised more than Rs 6,100 crore in the early part of 2010, to fund its expansion plans. The company had raised Rs 3,200 crore through a similar route in 2009.
Declining foreign factor
While domestic equity sourcing largely showed an uptick in 2010, overseas equity and equity-linked capital raised by Indian companies declined to around Rs 17,400 crore from Rs 32,400 crore in 2009. This is in keeping with the pattern since 2007, when equity capital raised overseas and FCCBs peaked at around Rs 67,200 crore.
Foreign currency convertible bonds, quite the rage in 2006 and 2007, saw a precipitous fall in 2008, coinciding with the credit squeeze in global financial markets and rapidly plummeting stock prices of Indian companies on the domestic bourses.
The revival in 2009, however, has not been sustained in 2010. Also, the trend of raising equity capital in the foreign markets has shown a decline. The number of such issues has halved from 18 in 2007 to 9 in 2010, perhaps a reflection of the uncertain economic conditions still prevalent in those markets.
Debt still dominates
Notwithstanding the strong growth in equity capital, the predominant role of debt in meeting the capital requirements of Indian corporates continued through 2010. At Rs 4,64,500 crore, domestic bonds and syndicated loans raised were more than four times the domestic equity capital raised in 2010, probably reflecting the reluctance of Indian companies to get listed or dilute equity.
Debt raised internationally also increased in 2010 to around Rs 1,10,000 crore from Rs 35,600 crore in 2009. This is however, still some way off from the 2007 peak of around Rs 1,50,000 crore For the latest updates PRESS CTR + D or visit Stock Market news Today
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