Fund-raising by India Inc Surges as Companies Sing the IPO Tune

• Indian companies raised Rs 4,950 crore through IPOs in the first half of FY15 versus Rs 1,017 crore in the same period in FY14
• Fund raising through the primary market route so far this year is nearly five times higher compared to last year
• 19 companies have received approval from Sebi to raise Rs 11,545 crore
• Seventeen other companies have sought permission to raise Rs 6,795 crore
• Sensex return over the last one year stood at 1.7% whereas the BSE IPO index gave a return of 18.3%

A surge in the number of companies lining up to raise money through an initial public offer (IPO) is, more often than not, a sign of a healthy equity market. That being the case, Indian markets certainly look like they are in strong hands.

Prime Database, the company that tracks fund raising through the primary market route, said that the amount raised by India Inc in the primary market this year is nearly five times higher compared to last year.

Indian companies raised Rs 4,950 crore through IPOs in the first half of the current fiscal as compared to Rs 1,017 crore during the same period in the previous fiscal year. Furthermore, investors have pumped in more money in the government’s divestment programme and promoter stake sales. Nearly Rs 12,916 crore was invested in listed companies where the owners decided to offload their stake in what is called the ‘offer for sale’ (OFS) route of raising money.

Only 16 per cent of the total amount raised from the market was through the issue of fresh capital which goes into asset creation.

So why has the IPO market seen a strong upsurge this year?

Relative Outperformance

The stock markets have gone nowhere since the NDA took charge in May last year. However, companies which have tapped the market in the last one year have done far better. Over the last one year the BSE Sensex has given a return of only 1.7 per cent, while the BSE IPO index, which is an index of companies raising money from the primary market through the IPO route, has given a return of 18.3 per cent. Clearly, IPO investments have been more rewarding than investing in the secondary markets.

Acche Din Ahead?

Though corporate numbers do not reflect any growth momentum in listed players yet, companies are sensing big opportunities ahead. Companies want to be ready with their installed capacity to take advantage of growth going forward, signs of which are already visible. The factory output (industrial production) data for August points to a recovery in the capital goods sector which suggests that capacity is being added in the economy.

Further, a look at the companies which have tapped the market gives some indication of what lies ahead. Three of the biggest IPOs over the last one year have been from logistics players like VRL Logistics, Snowman Logistics and Navkar Corporation. The movement of goods and materials is the first sign of a vibrant economy. Logistics players are feeling the need to expand to address increased demand from the movement of goods. Better roads and railways are GDP multipliers which would only induce more companies to tap the market going forward.

Party Has Just Begun

Already, the IPO pipeline for 2015 is looking strong. Data collated by Prime Database shows that 19 companies have received approval to raise Rs 11,545 crore from the markets. Seventeen other companies have sought permission to raise Rs 6,795 crore, which takes the total to Rs 18,340 crore, nearly four times the present figure.

The companies that have approached the market regulator Sebi to launch their public offers are from diverse sectors. Valuations too do not look too high. Earlier IPO booms were generally followed a strong equity market, but this time we are seeing capital raising despite a flat market.

Crowded Market Ahead

Companies raising money will, however, have to continue to compete with listed companies for investors’ funds, especially those planning to raise capital through a rights issue or offer for sale (OFS). The government’s ambitious divestment programme will also seek to attract investor interest and money. The divestment target for the current financial year stands at Rs 69,500 crore, of which only around 20 per cent has been raised.

Add to this, the massive amount of Rs 5 lakh crore that banks need over the next five years to meet the international Basel III guidelines, and we are staring at a huge and vibrant primary market going forward.

(The writer is a Mumbai-based market analyst)