If the jamboree in second-rung stocks persists with the sustained mid-cap rally, can the big boys be left behind? The poster boys of India Inc—Tata Consultancy Limited (TCS), Maruti, Indian Oil (IOC) and Bharat Petroleum (BPCL)—are gearing up to tap the stockmarkets over the next six months. Thus reviving hopes that our moribund primary market—hamstrung with vanishing companies, diminishing returns and frequent scams—is waking up from a long hibernation. Probable
Rs 1,000-crore offers each from multinational giants Hyundai, LG and Coke, to fulfil FIPB norms of equity divestment, have also triggered wide-scale market speculation.
After five turbulent years, it's prime time for primary issues with initial public offerings (IPOs) worth about Rs 30,000 crore waiting to tap the market. That's a mega shift from the past. 2001-02 saw an appalling run in the IPO segment with only six companies raising a mere Rs 1,082 crore in the entire fiscal. What's worse, the Rs 7,412-crore mobilisation of the last 5 years is 25 per cent less than even the single year IPO mobilisation of Rs 9,919 crore in 1994-95.
Dalal Street has been dumbfounded with the announcement of so many mega offerings within such a short span. Analysts are confident that if all IPOs declared in the last two months actually make it to the market soon, the breadth and depth of the secondary markets will automatically be enhanced. Companies waiting in the wings for years to raise fresh resources through the markets will also receive a confidence boost with the debt-dominated primary markets witnessing fresh equity inflows. "The IPO rush is imminent," says Prithvi Haldea, MD, Prime Database. "With a stable environment, in the next six months, we'll see the first round of IPOs with 8-10 big offers."
It's a nascent global trend that is having its slow rub-off effect on India. Says Ravi Kapoor, senior vice-president, DSP Merrill Lynch: "Things are looking up in the US and the IPO pipeline in Asia too is building up for the second half of the calendar."
In January 2002, Bharti's IPO was hyped to revive the fortunes of the Indian market but it dropped to sub-issue price levels and was a dampener. What rekindled hope was the attractively priced Punjab National Bank issue in March which closed with over four times oversubscription.
Says SEBI chairman G.N. Bajpai: "The oversubscription of PNB's issue highlights investor confidence. The new IPOs will certainly set the primary market in motion." The excitement has finally been consolidated last week with the i-Flex IPO getting oversubscribed 1.8 times amounting to 7.38 million shares with the majority bids coming in at the indicative minimum bid price of Rs 530.
Unlike the mid-'90s or the Ketan Parekh bull run—when promoters were hardselling dreams that would go bust—most of the companies queuing up with their offerings now are blue chips. India's largest software company TCS, for example, is planning to offload 10 per cent of its stake which could easily fetch Rs 4,000 crore. To spread the issue across markets for easy absorption and global access, an adr listing in the US has also been planned either simultaneously or just after the domestic issue.
Similarly, behemoths Maruti, IOC, HPCL, Nalco and GAIL are drafting blueprints to invite retail participation. For some of them, it's part of their disinvestment process. Together, they plan to dilute equity worth Rs 4,530 crore. Petroleum minister Ram Naik has recently cleared a BPCL proposal to make an IPO of about 50 crore equity shares to raise Rs 1,000 crore for the Bina refinery project and to increase the capital base by Rs 50-60 crore pre-privatisation. Says a senior BPCL official: "The IPO will be preceded by a stock split and offer of 5 per cent equity to the employees, bringing down the government equity to around 51 per cent.This will pave way for divestment of 25 per cent stake to a strategic investor."
The revival of sorts is substantially driven by the government initiative of disinvestment via the capital markets, and bank issues, feels Haldea. In Maruti, post the Rs 400-crore rights issue, the proposed IPO—3.6 million shares representing 25 per cent equity of Rs 100 face value will be sold—will be the second stage and Suzuki has agreed to underwrite the IPO at Rs 2,300 per share.
On the other hand, a central crackdown has forced the banks to board the IPO wagon. While the RBI has pressed private banks like the IDBI Bank to reduce promoter equity to 49 per cent, SEBI has held talks with major PSU banks to hasten their public offers and revive the capital market. Moreover, pursuing a stipulated capital adequacy ratio of 12 per cent by 2004, sans any infusion of government funds, banks are forced to opt for IPOs.
On a macro level, the reasons for this hubbub are more basic as primary market revival is intrinsically linked to a stable secondary market and signs of economic turnaround. Explains Shanti Ekambaram, CEO, Kotak Mahindra Capital Company: "In the first four to five months of this year, there's been a distinct turnaround, with core sectors recording improved results. Moreover, the current secondary market volatility is an extragenous function and the markets fundamentally remain undervalued by 15-25 per cent. With buoyancy slowly returning, companies with existing IPO plans see this as a great opportunity to raise capital." The limited activity in the last 16 months, coupled with rock-bottom interest rates and inflation, are also fuelling the aspirations of corporate India.
But will this frenzy trigger a bull run in the secondary markets as well? Historically, it's been the other way round: a thriving secondary market precedes an IPO boom. However, analysts believe technology has now made both markets a lot more inter-related. Says a confident Pallav Sinha, CEO, JM Morgan Stanley, Direct: "IPOs have a salutary effect on secondary markets as long as they enlarge the universe of quality corporates available for investment. The current regulations and 100 per cent book-building route will lead to a supply of quality scrips that can provide a fillip to the secondary market." What will also come handy is the positive market outlook with most research houses predicting the BSE Sensex crossing 4000 soon.
As long as the name and pricing are right, with strong management backup and growth prospects, there will be positive response, but some analysts feel absorbing the quantum of Rs 30,000 crore in a year is impossible. Thus a sequential pattern is likely with prices becoming aggressive with the market peaking. But with bond yields remaining flat, it's a matter of time before smart money moves into equities. Some of this asset reallocation has already started. "With investors receiving funds from share buybacks, redemption of UTI MIPS and event risk reducing substantially, the case for equity will become more compelling," says Sinha. Adds Kapoor: "Institutions are also preferring emerging market paper and retail investors need good investment opportunities with interest rates dwindling to 8 per cent."
There is excess flow of liquidity in the market. Of late, many MNCs have delisted. Further, the open offers that have come due to divestment in PSUs have also increased availability of funds in the hands of the investor and these are being eyed by the companies planning to raise money from the primary market through IPOs.
The dynamics of demand and supply will, however, continue to determine pricing. With the trend of book-building catching up, price discovery is entirely a function of what investors evaluate the fair value of the scrip to be.But as Sinha points out, "institutions are likely to steer the pricing, thereby somewhat insulating the possibly less informed retail investor". So, better take it an issue at a time.