IPO rush

The success of the DLF IPO, which was oversubscribed nearly 3.5 times, should give confidence to merchant bankers and companies that want to raise money in the capital market. DLF has raised Rs 9,000 crore, despite the fact that the issue was considered expensive""even optimistic analysts had recommended subscribing at the lower end of the price band. The story in the much smaller Vishal Retail IPO is even better. With a hot-button business like retail, the issue attracted over-subscription to the extent of 69 times. At the upper end of the price band, the company will collect Rs 129 crore. Meanwhile, ICICI Bank's follow-on issue will open today and is expected to raise Rs 10,000 crore from the domestic market, and another Rs 10,000 crore through an overseas issue. Even this issue should sail through comfortably.

The IPO market is based on two pillars""companies' need for capital, and the market's appetite for new paper. Merchant bankers are unanimous when they say that there will be a lot of fund-raising activity in the capital market from the real estate sector, in the wake of the DLF issue. Omaxe, for instance, is in the queue to raise Rs 1,400 crore, and is expected to come to the market next month. The other big sector that is slated to raise funds is banking. Central Bank of India will be coming with its maiden issue, while State Bank of India is expected to garner Rs 5,000 crore through a follow-on issue. Many other public and private sector banks will be raising capital this year. After all, the banking sector has seen advances grow 30 per cent annually for the past three years; and though this is likely to slow to about 25 per cent this year, banks will need more funds to finance loans and to shore up their capital adequacy ratios. Besides, there are state-owned enterprises like Bharat Earth Movers, National Hydroelectric Power Corporation and Power Grid Corporation of India, all of which have filed their draft red herring prospectuses with Sebi.

On the demand side, there is enough sustained interest in the stock market. The Sensex and the Nifty are fairly close to their all-time high levels, almost undeterred by the flow of negative news, like rising interest rates, the slowdown in auto sales, cement companies deferring a price increase, and so on. There is also enough liquidity with foreign investors and even domestic retail investors. There is also the charm of running a new business, be it retail or real estate, which keeps the interest in the IPO market alive. Plus, the opportunity to make money is also higher in a primary offering, with many issues listing at a premium to the offer price.

For companies, this is a good time to tap the market. With share prices ruling high, the cost of equity capital is low. Since interest rates are higher than before, term loans are only a secondary source of financing. With demand for funds from diverse sectors, and even some possibility of over-supply in areas like banking, there is little reason to believe that these issues will not go through as long as the pricing is right. For the secondary market, though, there may be a case for some adjustments in valuation""for example, with more paper from the real estate sector coming, the valuations of many companies will not stay at their current stratospheric levels.