The surge in the secondary market has encouraged many companies to hit the equity market for capital in search for better valuations.
After a muted performance till FY15, the Indian IPO market picked up in the last two years with 70 and 106 companies listed in FY16 and FY17 respectively. This further gained momentum in the current fiscal with 112 companies already hitting the IPO market till October 2017. India raised Rs 46,121 crore and Rs 49,438 crore in FY10 and FY11, respectively. After this, the market had turned lukewarm. In the current fiscal, Indian companies have raised Rs 49,175 crore in just seven months.
Between FY10 and FY18 (up to October 31, 2017), maximum amount of Rs 43,921 crore has been raised by power sector, followed by insurance, mining, minerals and metals, finance and construction. Insurance sector has come to the market this fiscal with four companies alone raising Rs 31,320 crore.
Avenue Supermarts has proved to be the appetiser for the equity market after a lull of almost seven years while Coal India Ltd received a bid for Rs 2,31,031 crore against its issue size of Rs 15,199.44 crore in November 2010.
Reasons for rising interest in IPOs
There are various reasons that can explain the recent splurge in the IPO market. Ease of listing criteria for MSME has been one of the reasons for increasing number of companies approaching the capital market. Furthermore, economic reform initiatives of the government have boosted sentiments of the market, which in turn has led to improvement in doing business. This is further corroborated by the recent sovereign rating upgrade by Moody’s.
The surge in the secondary market has encouraged many companies to hit the equity market in search of better valuations. When the market rises it is also the best time for promoters to raise money from the market.
Retail investors have shown an increased appetite for equity market, mutual funds and IPOs owing to lowering of interest rate on bank deposits and ease of investment in market. Also, strategic investors like sovereign wealth funds view such issues as opportunities to deploy significant amount of money.
Equity raising vs credit growth
Though there is no direct relation between credit growth and equity raising through IPOs, the years witnessing higher IPO in general have shown a modest pick-up in credit growth. IPO amount and All Scheduled Commercial Banks (ASCB) credit growth are correlated.
If sector-wise IPOs in various years and bank credit in those sectors is examined, the results are asymmetric, e.g., a positive relation between credit off-take and IPO is visible for some sectors with credit off-take picking up after IPOs in those sectors.
The power sector which raised a huge amount from the equity market in FY10 and FY11 witnessed significant credit growth during this period. Mining and quarrying, metals and minerals went to the IPO market in FY10, FY11 and these years saw higher credit disbursement in these sectors. In recent years, housing finance companies have raised a significant amount and credit to NBFC has also increased by around 11% in FY17 despite overall weak credit growth momentum.
Rise in IPOs presents a good picture for businesses and corporates as it represents a better option for raising money, especially in the current context. The current upsurge will last as long as the upswing in market continues. Also, the performance of the companies which got listed in recent years will determine the future course for the IPO market.
If they give decent returns to investors with their average price remaining above their listing price, then it will remain an attractive source of investment. However, it cannot be assumed to replace debt financing through banks as the former depends on market sentiments which can be very volatile depending upon domestic as well as global developments.
Extracted from SBI Ecowrap