Short term stock market volatility must not deter companies from planning IPOs, as India's growth momentum will continue for next 3-4 years. Dara Kalyaniwala of Prabhudas Lilladher reveals key things to consider before stock market listing. Read full interview.
Indian economy is on a growth trajectory, and nothing can derail it, including the upcoming Lok Sabha elections in 2019, or even a possible change in the government. In this context, the short term stock market volatility must not deter companies from planning their IPOs and getting ready to raise funds by stock market listing, says Dara Kalyaniwala, Vice President, Investment Banking, Prabhudas Lilladher. Further, while India heads towards the crucial election season, businesses are comfortable with Narendra Modi as the Prime Minister and would prefer the current government to continue, more so due to the lack of a viable alternative, he adds.
In a comprehensive interview with Shaleen Agrawal of FE Online, Dara Kalyaniwala shares key factors that companies must consider while going for an IPO. He also shares his advice to retail investors on investing in the stock market. Here are the edited excerpts.
Q. Why or when should small- to mid-sized companies go for an IPO?
Companies keep looking for funds to grow business. If a company has enough leverage capacity, then it goes for debt funding, ie, bank loans. However, some promoters get nervous in taking on larger bank debts as compared to equity. In such cases, often the company decides to go for equity funding. In other cases, such as when a company exhausts its working capital borrowing limits, but needs further funds. When banks cannot lend to the company beyond a certain proportion of the promoters’ funds invested in the company, in such cases, the promoters need to bring in more money to be able to enhance their borrowing limits. Now, if the promoters find it difficult, then we suggest that it’s best to go for a PE fund raise or an IPO and raise the funds from the market. One must realise that some sectors like old age industries like cotton yarn or trading companies etc are not very exciting for private equity players and hence even for such companies it makes sense to do an IPO.
Q. Stock markets have turned choppy of late, and continue to remain under pressure. Do you still advise your clients to go for IPO funding?
Our advise on this doesn’t depend on day-to-day market movements. This is because we do not question India’s growth in the long term, which as a long-term story is viable. So far as economy and business are concerned, industrialists are focussing on what they want to do and what they wish to achieve. This momentum in my view will continue for another 3-4 years. So, when a company plans for an IPO, it takes us about four months to prepare the document, and then a couple of more months for the regulatory approvals. After this, the company has the regulatory approvals valid for one year to launch the IPO. This is enough time for the market cycle to turn around and provide ample opportunity for raising funds. A company must keep itself ready to take advantage of the favourable market whenever it happens. However, if a company starts the process for an IPO only when the market takes an upturn, then it will take about an year to actually launch an IPO, and the Company may miss the growth opportunity.
Q. Could the upcoming Lok Sabha election 2019 hurt the growth momentum you just spoke about? What would happen to the growth if the government changes?
Even if the government changes, I don’t think the new establishment would do something to mess up the economy’s growth trajectory. Further, a sudden change of government would also depend on availability of viable alternative for the electorate. From our conversations and the feedback that we get from Industrialists, it is that the businesses are pretty comfortable with the BJP-led government, and most of them think that it’s better to continue with the present dispensation.
Q. What has been the impact of GST on businesses?
GST has freed up a lot of working capital for businesses. SMEs face pricing pressure from unorganised & smaller entities which did not take excise duty or sales tax into account. In such cases, SME businesses have been positively impacted by GST because all such unorganised & smaller players do not have an escape route of not accounting for taxes. We have seen that with most of the businesses, the GST accounting systems are in place. As for the larger picture, lot of revenue which was not reported earlier is getting reported; a lot of movement of goods is getting reported. All this is positive.
Q. What are the key factors a company raising IPO funds must keep in mind?
- Do not think that IPO funds are coming for “free” and that the Company is not answerable. Equity funds are expensive as compared to debt.
- Raise funds only to the extent required with 5% extra for contingencies.
- Expect to do the IPO at a fair valuation; do not do an IPO at inflated valuations to extract the last rupee from the investors.
- Maximum portion of IPO Funds should be used for identified projects or to repay debt or for working capital.
- Do not raise more than 5-7% of funds even though the present SEBI regulations permit a Company to raise upto 25% for “General Corporate Purposes”; which basically refers to funds being raised for unidentified purposes at the time of the IPO.
- Appoint a good team of Investment Bank; Legal Advisor and Auditor.
- Do not cut corners while negotiating fees.
- Do not appoint an Investment Bank purely on the basis of whoever is giving the highest valuation for the Company.
Q. Which sectors do you think will find it difficult to raise money in the current environment OR in short term?
Sectors like Textiles (not branded garments); commodity players; trading sector; sectors where a lot of imports are required are the difficult sectors.
Q. Where should the retail investors put in their money now?
Retail investors must look into well managed large listed companies which are available at “sale” prices. If they cannot spare time personally to study listed companies, they should invest in equity oriented mutual funds.