Slump in Activity: Dip in capital issues due to tepid investor response

Dip in capital issues due to tepid investor response

The initial public offering (IPO) market for the economy as a whole has showed signs of revival since 2015-16. The current fiscal year (till November 2016) recorded the highest issuances since 2010-11. However, a similar trend was not mirrored in the infrastructure space, which was marked by muted activity in the same period). The market for qualified institutional placements (QIPs), an alternative mode of raising funds for listed companies, has also seen a slump with no issuances in the current fiscal year.

Size and growth

During the period 2011-12 to 2016-17 (till November 2016), there were a total of 21 IPOs launched by infrastructure companies. These offerings raised funds to the tune of Rs 142.07 billion. IPO activity peaked in 2015-16, both in terms of value and the number of deals. InterGlobe Aviation raised Rs 30.1 billion, the biggest IPO in 2015-16 and the second biggest ever in the country, after Bharti Infratel’s over Rs 40 billion offering in 2012-13. During April-November 2016, only three offers were recorded raising Rs 16.98 billion as against nine IPOs garnering Rs 56.05 billion in the corresponding period of the previous fiscal year.

In terms of funds raised, the telecom sector accounted for the leading share, followed by aviation and the diversified sector. In terms of the number of deals, the maximum issuances were recorded in the diversified sector, followed by logistics. Although there was only one deal in the aviation sector, it was the highest in terms of funds raised.

With respect to QIPs, fund raising during the period 2010-11 to 2015-16 exhibited 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 both in terms of volume and value, during the period under consideration. During 2014-15, 16 issuances worth about Rs 142 billion were witnessed in the infrastructure space. These were dominated by telecom companies which accounted for over half the value of QIPs during the year. In 2015-16, though, there were only three placements worth Rs 13 billion and all three belonged to diversified players.

Slowdown in capital market activity for infrastructure projects

The uptick in IPO activity in the infrastructure space seen in 2015-16 is slowing down this fiscal year. This is unlike other sectors such as pharmaceuticals and financial services where more and more firms are hitting the market with offerings. This could be attributed to factors such as sector-specific issues, high valuation expectations of promoters and private equity investors, and a poorer-than-expected financial performance due to which companies are unable to launch IPOs despite the strong momentum in the primary markets.

The lack of investor appetite is further affirmed by the lukewarm response of investors to the recent public issues in the sector. In this context, increased public spending on infrastructure and expediting the process of cleaning up the balance sheets of companies becomes necessary to reinstill investor confidence in the sector.

Market experts are of the view that fund-raising through QIPs has slowed down in the past few months as companies are looking to sell shares at high valuations while investors are reluctant to buy shares at high prices. Another major reason has been the stock performance by infrastructure firms. Stocks of all infrastructure players that came out with QIP issuances in 2014-15 are trading below the offer price, reflecting the fact that investors are incurring losses. Apart from this, the fact that some of the major players are going for debt restructuring has also reduced investor appetite for the sector.