Indian capital markets have recently witnessed heightened initial public offer (IPO) activity as a number of infrastructure players have forayed into the market to raise fresh funds. However, the current number of IPOs is still much below the number witnessed during 2010-11, after which there was a slowdown. The issuances by fundamentally robust and fair-valued companies (such as InterGlobe Aviation) marked a “big success” in primary markets. The over-subscription of most of the issuances over the past 12-15 months reflects the fact that they were well received.
During the period 2010-11 to 2015-16, there were 28 IPOs by infrastructure companies which raised funds to the tune of over Rs 352 billion. While IPO activity remained muted after 2010-11, it picked up somewhat in 2015-16, when six IPOs raised almost Rs 50 billion. This was in sharp contrast to the three issuances worth Rs 10.72 billion in 2014-15.
In terms of the sector-wise amount raised, the power sector constituted the highest share in 2014-15 (65 per cent). This declined to a mere 5 per cent in 2015-16, the lowest among all sectors. The share of the logistics sector halved in 2015-16 as compared to 2014-15, while InterGlobe Aviation’s IPO gave the aviation sector a 60 per cent share of the total amount raised through IPOs in 2015-16. The company’s IPO issuance is the second largest after Bharti Infratel’s Rs 41.18 billion IPO in 2012-13.
Meanwhile, VRL Logistics’ IPO (April 2015) marked an interesting development – it was oversubscribed 74 times, led by strong demand from institutional investors. This is the highest response a public issue has received in the last eight years, beating Reliance Power’s IPO (January 2008), which was oversubscribed about 73 times.
Returns on IPO issues over the past two years have been a mix of both positive and negative. Stocks of companies such as InterGlobe Aviation and VRL Logistics have fared well, while those of companies like MEP Infrastructure Developers Limited and Sadbhav Infrastructure Projects Limited have given negative internal rates of return.
A follow-on public offer (FPO) is the issue of equity shares by a company that is already listed on the stock exchange. From 2010-11 to 2015-16, only five FPOs, that raised Rs 219 billion, were witnessed. The last FPO in the infrastructure sector was in December 2013, when the government divested its holding in Power Grid Corporation of India Limited. The FPO raised Rs 75 billion.
Outlook
At present, India is being perceived as a “resilient” investment destination, amidst a scenario where most of the emerging economies worldwide are entering a low-growth phase. Factors such as policy announcements related to the ease of doing business, and those pertaining to programmes such as “Make in India” augur well for the country, as these reflect the government’s commitment towards providing an environment conducive to spurring investments.
The Securities and Exchange Board of India (SEBI) has also announced measures to ease the process of fund-raising through the IPO/FPO route. The listing time has been halved to six days from the date of the public offer. Further, SEBI has also reduced the requirement of market capitalisation of public shareholding of the issuer for fast-track issues (FTI) from Rs 30 billion to Rs 10 billion in case of FPOs and to Rs 2.5 billion in the case of rights issues. This will enable a larger number of firms to tap the “fast-track” route for raising funds.
There is a healthy pipeline of six IPOs planned in the infrastructure space. These are IPOs by Mahanagar Gas Limited, Cochin Shipyard Limited, Vodafone India, GVR Infraprojects Limited, GoAir, and Dilip Buildcon Limited. However, realisation and market performance depend crucially on the government’s commitment towards boosting investment.
IPOs in India are estimated to raise over $5 billion in 2016-17, largely owing to a growing appetite for equities, positive sentiment on the growth front, the government’s plans to divest stake in state-owned enterprises (notably in insurance companies), and a robust IPO issuances pipeline.
QIP – Muted activity in recent months
A qualified institutional placement (QIP) is an alternative mode of raising resources that is available to listed companies. In a QIP, a listed entity issues equity shares, fully and partly convertible debentures, or other securities that are convertible to equity shares, to institutional investors. QIPs are still popular in India as they are one of the best ways for companies to raise money in a short time period giving ample liquidity to large buyers.
QIP-routed fund-raising from the period 2010-11 to 2015-16 has shown a mixed trend. While a decline was witnessed during 2012-13 and 2013-14, the surge in 2014-15 was significant –rather, it was the highest, in terms of both number and value. During 2014-15, 16 issuances worth about Rs 142 billion were seen in the infrastructure space. In 2015-16, there were only three placements worth Rs 13 billion.
Several players in the infrastructure sector tapped the QIP route in 2014-15 to raise funds for expansion, refinancing of debt and to meet working capital requirements. The surge in QIP issues in the previous fiscal year can be attributed to market exuberance, largely driven by sentiment rather than fundamentals. However, at present, there is a slump in fund-raising through QIPs. Volatility in the equity market, especially after China’s currency devaluation, has been one of the main reasons. Besides, market experts are of the opinion that fund raising through QIPs has slowed down in the last few months as companies are looking to sell shares at high valuations while investors are reluctant to buy the shares at high prices. Another major reason has been the poor stock performance by infrastructure firms. Stocks of all infrastructure players that came out with QIP issuances in 2014-15 are trading at below the offer price, resulting in the investors incurring losses. Apart from this, the fact that some of the major players are going in for debt restructuring has reduced investor appetite as well.
The key companies issuing QIPs are spread across various sectors. These include the power sector, diversified players, infrastructure financiers, etc. In 2014-15, the issuances were dominated by telecom companies, which accounted for over half the value of the total issues during the year. In 2015-16, all the three issuances in the infrastructure sector were from diversified players.
Outlook
Typically, QIPs are subscribed from a longer-term view, of, say two to three years. Though at present, stocks of many infrastructure companies are trading below their offer price, they are expected to perform well in within two-three years. QIP issuances depend crucially on investor sentiment. This is reflected by the surge in the activity in 2014, after the general elections. The new government helped improve business confidence, thereby reviving activity in capital markets. However, as policy announcements take time to translate into action in the economy, in the long term, the QIP space looks promising.
Besides, a lot will depend on the specifics of a given infrastructure segment. For instance, renewable energy players have not forayed into the QIP space yet. Given the growth in the sector in recent years and the plans of the government to accelerate energy generation through these means, resorting to the QIP route would make economic sense. Another factor is fair valuation: only fairly valued firms, reflecting correct fundamentals, will attract investor interest, which in turn will determine how QIP issuances fare.
The Reserve Bank of India (RBI), in its first bimonthly monetary policy review for 2016-17, pared the repo rate by 25 basis points to 6.5 per cent and eased liquidity conditions. The move is expected to kick-start the investment cycle and boost economic activity. Increased consumption coupled with lower interest rates will translate into high profits and thus better valuations for the equity market. The repo rate cut will also lead to the flow of money from lower-yielding debt instruments to the risky yet high-return-yielding equity market. The move will be a key positive for interest rate-sensitive sectors such as banks, capital goods, realty, and infrastructure stocks.
The right fundamentals, fair pricing and overall positive business sentiment will pave the way for future QIP issuances.
