The acute liquidity crisis, which companies faced till December last year seems to have eased out. Fund-raising by corporates has picked up significantly with the market looking up in the first two months of the current fiscal.

Various estimates peg that funds raised in the last two months?April and May?amounted to about Rs 5,000 crore, which is four times of what it was in the corresponding period last year. ?The severe liquidity crisis has eased and corporates are now able to raise funds to meet their capex and opex requirements through various means, which include QIPs, equity dilution, and corporate borrowing from banks and financial institutions,? says Dinesh Thakkar, chairman and managing director, Angel Broking.

Merchant bankers say that a stable government at the Centre has reduced the perceived political risk and corporates are hopeful that investment decisions will speed up as green shoots of recovery are seen in some sectors like steel, cement, affordable housing, FMCG and to some extent in automobiles. They also feel that after the Budget there could a few IPOs, including big-ticket PSU issues. In fact, 18 draft red-herring prospectus have been filed with SEBI for IPOs that can come out in the next one year.

S S Chakraborty, chairman, Consulting Engineering Services, says that in the current fiscal, an all-round improvement in the liquidity is seen within the system. ?The availability and affordability of credit has eased with higher credit disbursals, although the approach remains cautious and credit is confined to large and quality borrowers,? he notes.

Window of opportunity

Following the series of monetary measures taken by RBI, the bank lending rates for companies have come down steadily from 14-15% to 11-12%. And with falling interest rates on fresh deposits, the cost of funds for banks is set to reduce, thus paving the way for further reduction in lending rates. The risk-aversion of lending institutions is giving way to a very small appetite for risk once again and banks are becoming more confident to lend as the risks of non-performing assets recede.

Indian banks, one of the major sources of funds for companies, are gradually increasing their lending to companies, and increasing their appetite in tandem with the improving prospects of the economy. S A Bhatt, chairman, Indian Overseas Bank, says the bank is seeing loan demand rising from across the board, particularly from infrastructure, fertiliser and aviation companies.

Interest rate is not just attractive locally, even global money markets are fast becoming favourable for Indian companies to borrow. The rising tide in the global liquidity situation is clear from the movement of LIBOR, the rate at which banks lend to each other in London. When the three-month LIBOR declined to 1.42% by the end of December 2008 from as high as 4% in September last year, global industry got a sigh of relief. But with three-month LIBOR now at 0.63%, Indian companies are likely to hit the foreign loan street soon.

Similarly, ICICI Bank?s Credit Default Swap, widely considered as the benchmark for measuring investor appetite for Indian debt, has fallen to levels before investment bank Lehmann Brothers collapsed.

In fact, in the past three years Indian companies raised $70 billion through syndicated loans in the international market. However, analysts feel that even at the current rate, the cost of borrowing from abroad is still higher than a local loan. For an AAA-rated Indian company needing funds for a five-year period, the cost would be around 12% a year, including the hedging for the interest rate and currency risk. The same, on the other hand, would be available at around 11% from local sources and still lower if the company sells its bonds.

Flavour of the season

Qualified Institutional Placements (QIPs), a new method introduced in May 2006 for companies to raise funds from the market seem to be the flavour of the moment. In this, a company sells equity to large institutions, foreign venture capital and institutional investors registered with Sebi. They are cheap, fast and an easy route to raise equity capital and most importantly, they are less restrictive for institutional investors since there is no lock-in period. Moreover, in case of initial public offer or follow on public offer, it would take about four to five months to raise the capital, but in the case of QIPs everything can be wrapped up in matter of few days.

Thakkar of Angel Broking terms the QIP route as a win-win situation for the parties involved in the deal. ?While a company facing challenging times, owing to the weak economic cycle and a highly leveraged balance sheet, is able to raise funds to survive through the tough times, the equity dilution is aiding the de-leveraging of balance sheet, which is being taken positively by the market and reflected in higher stock price, thus benefiting the investors, ? he says.

In little over a month, the money raised through QIPs has actually exceeded the Rs 3,600-crore raised in the whole of last year. The party is being led by infrastructure and real estate companies as investors are anticipating perk up in government spending to kickstart the economy. The valuation of many companies in these sectors had hit rock bottom after the economic slowdown. Some of the notable companies who took the route are Unitech, Indiabulls Real Estate and Parsvnath Developers. Even HDIL, LIC Housing Finance and Essar Oil, among others, have announced QIPs.

Analysts estimate that Indian companies are looking to raise nearly Rs 50,000 crore through QIPs over the next few months, provided the rally in the stockmarket sustains. This, in turn, has also created pricing pressure with fund managers asking for steep discounts on the prevailing market prices, much to the dismay of the promoters.

Ashutosh Maheshwari, chief operating officer, Motilal Oswal Investment Advisors, says QIPs as a source is lucrative at reasonable prices. ?Given the run up in prices, it is unlikely that all primary issues will go through, particularly where the fund is opportunistic. Momentum will sustain as long as deserving issues with need for capital and at fair pricing come to the market,? he underlines.

Though the party may last for a few more months, analysts have a word of caution: The QIP pipeline is strong, but the closure rate is not impressive still. And with so many companies announcing QIPs at the same time, there could be a problem of bunching, which could again put pressure on the secondary market. Also, the rush to raise capital could be opportunistic as many companies desperately need cash to mend their debt-torn balance sheets.

PE not too buoyant yet

Private equity (PE) players were the frontrunner in sustaining much of the mergers and acquisitions till early last year and went on a frenzied spending spree, fuelling valuation of companies across the board. But this time around investors like Citigroup, IIML and ChrysCapital, who were very active in 2004 and 2005, are making use of the rising public markets to book profits in some of their earlier investments.

Arun Natarajan, managing director and CEO, Venture Intelligence, a research service focused on PE and M&A activity, says as long as the public markets remain strong, PE investment would pick up in the second half of 2009. ?There is a general lag between the public equity markets and the private equity markets. In 2008, when public markets declined rapidly in the first half of the year, PE investors were still actively committing money. Similarly, while the first half of 2009 has been good for public markets, things are still slow on the PE side,? he elaborates.

Venture Intelligence estimates that in April and May this year, PE players have invested $864 million across 36 deals, much less than 52 deals worth $1,461 million done during the same period last year. Natarajan feels that infrastructure sectors like telecom and power, education, healthcare and financial services would continue to attract PE investors.

Capex plans on hold

The current rally in the stock market may be an encouraging sign and confidence-booster for the corporate world to go ahead with their capex plans. But, are companies really relooking at their shelved capex plans?

Apurva Shah, vice-president and head of research, Prabhudas Lilladher, a broking company, says with a cautious note that the sustained upturn in the capex cycle will require a combination of improvement in demand and still lower interest rates. ?We don?t see a material upturn happening in the capex cycle for at least another six-nine months. Current capacity utilisation levels in the industry are not high enough to justify a significant new round of expansion.?

Industry players are not too upbeat on their long-term capex plans forthright. Lalit Kumar Jain, chairman and managing director of Lakshmi Precision Screws Ltd, a leading auto component manufacturer, says the company?s capex plans would depend on the forthcoming Union Budget. ?Some capex is indispensable, but the actual upward movement would start by the end of next year. Currently, we are very conscious and would have to wait for the second quarter to end before going ahead with our capex plans.?

Analysts believe that though the market sentiment may act as a booster to raise equity and deleverage a company, the decision to expand capacities is sometime away. ?Exports are falling and domestic demand is growing but not fast enough to absorb the gap which exists today. Capex decisions in manufacturing sector are still 12-18 months away. But the silver lining is that infrastructure spending like power and roads has seen momentum due to availability of capital now,? says Maheshvari of Motilal Oswal.