With the stock markets registering some spectacular rises, many Indian companies are once again looking at raising money by selling equity. Some firms, like Unitech and DLF, have already raised money through block trades.
Sources now believe that the next few months can see more companies raising money through qualified institutional placements (QIPs) and private equity.
“Equity markets have opened up in the last few weeks. A lot of companies are raising money. Moreover, investment bankers are running around with proposals to raise money,” said the CEO of a Mumbai-based company.
The success of the Unitech and DLF block deals have encouraged other companies to jump onto the bandwagon.
A couple of QIPs are also in the works (one by a Mumbai real estate firm; others like GMR Infrastructure and Sobha Developers are waiting for shareholders’ approvals).
A few other companies, like Adani Power, which had deferred their IPOs last year, are dusting their prospectus now.
“QIPs will be faster. Many real estate and infrastructure companies don’t mind diluting stakes at current market prices,” said A Murugappan, executive director, ICICI Securities.
Investment bankers say that Indian companies have raised over $2.5 billion in a month and, globally, companies have raised $16 billion equity in the last few months. Indiabulls Real Estate (Ibrel) has raised $550 million (Rs 2,585 crore) by selling shares at a discount to overseas investors, including TPG Capital and Fidelity. It sold shares at Rs 185, which was 6 per cent lower than Monday’s price of Rs 197.50.
Murugappan said investors were not sure earlier about the economy’s prospects. Now both foreign as well as Indian investors believe the worst is behind us.
“Foreign investors believe India is not as badly placed as the rest, as it will grow at 5-6 per cent. With a stable government and the infrastructure push, growth could be more than 6 per cent,” Murugappan said.
Investors believe Indian companies will do well, and hence, have started buying in the secondary market. Foreign institutional investors (FIIs) have bought stocks worth Rs 17,310 crore in April and till date in May, according to regulator Sebi. Investment bankers say the next few months can see many QIP deals led by FIIs. Domestic mutual funds and insurance companies, who are sitting on huge amounts of cash, can also invest in these issues.
Investment bankers say the FIIs who are keen on investing in Indian companies are from either the far East or from the United States and include names like Fidelity, Prudential and Capital International, among others.
“These investors are long-only funds, who have a medium-term outlook, and may include domestic institutions like mutual funds and insurance companies,” said an investment banker.
What’s changed for investors to start investing? Two or three things. Investors are willing to take a call on equity, the world has become clearer, and the recent rally in the Indian stock markets have improved valuations. Investment bankers say FIIs have money to deploy and find India and China attractive.
“Capital was available, but people were not willing to take a call on equity. Today, the world has become clearer and many believe the worst is over. There’s growth in India. The view investors are taking is that if the market is going to go back to the earlier level, there’s value in entering at this level,” said the head of mergers and acquisitions (M&A) at a leading conglomerate.
GMR Infrastructure CFO A Subba Rao also says investors are loosening their purse-strings as they believe the worst is over.
“The US banks’ stress tests are over. There’s reason for confidence that they cannot go wrong from here,” said Rao. Valuations have become reasonable, with many stocks rising by 50-100 per cent in the current rally. Bankers say the investor sentiment has improved on the institutional side, too.
Rao feels the market is ripe for QIP deals, and companies will take approvals from shareholders. GMR itself has convened a shareholders’ meeting on June 9 to take approval for raising money by selling equity.
“We will see many companies raising money through QIPs, unless the market condition suddenly deteriorates,” said Rao.
Ramesh Srinivasan, COO, Kotak Investment Banking, says QIPs will happen first, as they are faster to close. A QIP deal can be closed in a month, as it does not require regulatory approvals, while a public offering can take months. Some companies can raise money from private equity funds but they will be highly selective.
The equity drive is also driven by a need for equity. Two years ago, many companies had drawn up big expansion plans when the cashflows were good and the market was robust.
“They focused on ensuring that projects were robust, while debt was available. Today, many Indian companies have issues around equity as the avenues have become limited,” explained the M&A head with a conglomerate.
“You need equity, otherwise you cannot close a project, as banks are not willing to lend beyond a gearing,” said Kotak’s Murugappan.
Take power projects. Earlier, banks were comfortable with a debt-equity ratio of 80:20; today they may not be willing to extend debt beyond 70 per cent. Indian companies are struggling with equity also because cash accruals have fallen sharply. Cash profits of the BSE 200 companies fell 13.26 per cent for the year ended March 2009, excluding finance and oil firms.
