There is no doubt that these sectors have been impacted more than many other sectors, especially as their revenue lines almost disappeared during the lockdown.
By Malini Bhupta
Companies are planning to build a war chest as the pandemic is not showing any signs of easing. Corporate India is considering the option of raising over Rs 150,000 crore of equity capital over the next four to five quarters if the markets continue to be conducive and flush with liquidity. Salil Pitale, joint managing director and Co-CEO of Axis Capital, tells Malini Bhupta in an interview that companies are raising equity capital to either deleverage or to meet business exigencies. Edited excerpts.
What are the fundraising plans of India Inc?
Fund raising plans for numerous companies hit a roadblock in March on account of the lockdown and a steep market correction. Most issuers had to stay away from the markets for a while. The quick market recovery (Nifty has moved up over 40% in the last 100 days) and strong liquidity across global markets offer an opportunity to raise capital.
While the business impact of Covid-19 is difficult to ascertain completely, many smart corporates realise that since full normalcy may take a while, it may be prudent to raise equity capital to either deleverage or to meet any business exigencies. Consequently, deal activity has picked up recently — had started with secondary blocks, but now we see good traction for QIPs, rights, FPOs and IPOs, too. Over the last 75 days, over Rs100,000 crore of capital market transactions have been completed, led by the mega Rs 53,000-cr rights issue of Reliance Industries. A few rights issues as well as FPO / IPO have already been announced. We expect over Rs150,000 crore of potential equity capital raise being planned over the next four-five quarters, if the markets continue to be conducive.
What kind of companies are raising capital?
The financial services space will constitute the largest piece of the fundraising. We expect REITs to also find favour. There will be corporates across sectors, who will raise capital to deleverage and/or fortify their balance sheets. We expect markets to be selective and will largely back quality companies — especially leaders in respective sectors, even if they have had a temporary setback because of Covid-induced lockdown.
How are issues being priced and fundraising done if it is hard to predict how the pandemic will impact businesses?
Public market investors usually like predictable business models. The pandemic has impacted this “predictability” parameter for many sectors. Existing listed companies have a longer markets track record and, therefore, investors will have greater comfort with their business / management compared to IPO companies. It is precisely for this reason that too many IPOs are unlikely to happen. For follow on fundraising, investors are willing to consider likely earnings well beyond FY21. They are evaluating opportunities with a favourable risk-return trade off. Companies, where the underlying business is strong and less impacted by the pandemic, are seeing greater traction.
What about doing IPOs online without any physical roadshows?
The enhanced efficiency of roadshows has been a positive fallout of the pandemic. For potential issuers, the access to investors across the globe has been seamless. The fantastic usage of communication technology that we have all experienced is the new norm and is here to stay. Axis Capital recently did a virtual conference with over 65 companies and over 500 fund representatives, and it was super effective.
While institutional investor connect in a virtual format is efficient, IPOs will have some challenges in ensuring widespread retail participation, given the traditional broker/sub-broker network approach to generating retail interest. The heartening point is the rapid increase in retail demat and trading accounts during the pandemic, and better acceptance of the digital channels even for retail applications — the recent Reliance rights issue was an excellent case in point. We expect future IPOs to be largely driven by virtual roadshow formats.
Do you expect delisting and buybacks to become a trend in these times?
A serious stock undervaluation, inspite of positive business outlook, is the key trigger for delisting. Certain MNCs explore delisting to be in line with their global policies. In the last six years there have been only 15 delisting offers (only about 12 successful) as the regulatory challenges were high. Regulatory guidelines are more amenable now and therefore some corporates started exploring delisting, as valuations suddenly became very compelling. However, recent valuation bounce back and large market liquidity could be a deterrent to this.
Similarly, Buybacks are driven by low valuations, when the business outlook on cash generation is very positive. When valuations fell in March, Buybacks seemed logical. But subsequent lockdown induced change in business outlook has compelled Corporates to avoid buybacks and conserve the cash for the future.
Do foreign investors have an appetite for Indian paper?
Foreign investors definitely have appetite for quality Indian paper. This is supported by strong global liquidity and near-zero interest rates across the globe. India is still seen as an important growth economy, where domestic consumption will be a key driver. The pandemic/ lockdown may have dented this temporarily, but global investors expect a bounce back. They continue to evaluate and invest in sectors / companies, which are expected to thrive after the dust settles on the pandemic.
What about sectors most affected like aviation, hospitality, entertainment, restaurants etc?
There is no doubt that these sectors have been impacted more than many other sectors, especially as their revenue lines almost disappeared during the lockdown. But the investor belief is there, that these sectors will bounce back in a post-Covid era. The outcome may not be the same across players. The sector leaders will continue to be favoured by investors, but the laggards or even the middle-rung players will find the going tougher. The leaders will raise capital to strengthen balance sheets (recent PVR rights issue announcement is a case in point). The weaker players will need to exit or risk shutting down.
How is the IPO pipeline?
The IPO market is just about opening up, and we expect it to be selective. Companies with reasonably predictable business models in the current environment are likely to draw investor interest. Companies in sectors like chemicals, pharma, healthcare, select services, select consumer, commercial REITs, apart from BFSI, are more likely to interest investors. The after-market performance of the early IPOs will set the trend for the IPO market over the next four -six quarters. Overall, we don’t expect a rush of IPOs, but rather a few select deals getting good acceptance.