IPO drought

Written by Raj Kumar Ray | Updated: Jan 3 2014, 08:19am hrs
If initial public offerings (IPO) in 2013 touched a 12-year low of R1,619 crore, something is horribly wrong with the investment sentiment in India. The equities market not just provides the cheapest source of funding for corporates, it also signals the investment appetite and the future growth prospects of the economy. Despite interest costs remaining high, only 3 companies have tapped the main equities market raising R1,283 crore in 2013 as against 11 companies who together raised R6,835 crore. The reasons aren't unknownpoor sentiment, volatility in the secondary market, dismal valuation of shares, apprehensions of regulators views on valuation, lack of appetite for equity of big-time issuers from the infrastructure sector and the government's inability to push through disinvestment of unlisted PSUs. Though analysts expect investors returning to equities market in 2014 and hence greater risk appetite for IPOs, companies will remain wary of raising funds unless there is a revival in domestic demand and a fair amount of political stability.

What's important, all the three firms that went for IPOJustdial, Repco Home Finance and V-Mart Retailwere from the services sector and none from manufacturing. If India aspires to expand the share of manufacturing to 25% of GDP in a decade from the present 17%, it is expected that more manufacturers would want to raise capital to expand capacities. However, the ASI survey shows that, after the Lehman crisis, manufacturers have become more competitive as they weathered the cumulative impacts of rising costs of fuels, wages and interest payments to post 12-17% growth in profit but cut back investment. Not surprisingly, GDP growth plunged to 4.6% in H1 of FY14 from 9.3% in FY11.

There is one silver-lining around the cloudy economic scenariothere was a flurry of activity on the SME platform with 35 small companies listing shares to raise R335 crore in 2013 as against 14 such IPOs that mopped up R103 crore in 2012. The signal is clearmore smaller entities are aspiring to enter the big league. The government should redefine SMEs with a higher capital limit and ease labour laws to help SMEs grow faster.