By: The Financial Express |
October 29, 2021, 6:00 AM
There may have been differences of opinion on valuations, and the fact that 40% of the issuances are trading at a discount, despite the secondary market remaining buoyant, reveals that some companies were fortunate to command the valuations that they did.
Be that as it may, investors would not have bet on all these businesses to the extent they have had they not believed in their potential.
Raising capital, it would seem, has never been easier. With Nykaa tipped to raise over Rs 5,300 crore and the Rs 18,000 crore IPO (Initial Public Offering) of PayTm scheduled for next month, the equity capital raised in 2021 could well hit Rs 1 lakh crore; data from CARE Ratings shows some Rs 72,000 crore has already been mopped up across 87 companies. To be sure, the IPO market has been boosted by the strong sentiment in the secondary market; the Sensex rose from 47,751 in December 2020 to 61,350 in October. Be that as it may, investors would not have bet on all these businesses to the extent they have had they not believed in their potential.
There may have been differences of opinion on valuations, and the fact that 40% of the issuances are trading at a discount, despite the secondary market remaining buoyant, reveals that some companies were fortunate to command the valuations that they did.
However, what is important is that companies today are able to mobilise capital in such large quantities. As Neelkanth Mishra, co-head of Asia Pacific Strategy and India Strategist, Credit Suisse, has pointed out, over the last decade, private equity (PE) players have invested more money in businesses than has been raised in the market. Most of the PE funds are of foreign origin, and a big chunk of their investments has gone into start-ups. They clearly saw the potential in the e-commerce and other internet-driven spaces and backed them.
Now, local investors—wholesale and retail—are willing to back these businesses. This is important because, a few years ago, when a large number of Indian companies were faring badly and were over-leveraged to boot, it appeared as though there would not be enough capital to fund the next round of investment. In 2018-19 and 2019-20, apart from a handful of companies, most were struggling to earn strong cash-flows. This was particularly true for the infrastructure space where mid-sized business houses were in deep trouble as projects remained stalled and loan repayments piled up.
While there has been a strong turnaround in the corporate sector, and companies today are far less leveraged, it is not clear how much capital they would have to be able to fund new businesses. Typically, those in businesses like infrastructure and manufacturing do not always have too much cash to spare. The truth is that, in the good old days, some part of the promoter’s equity contribution was culled out of the bank loans; that might not be so easy today. In the new circumstances, a promoter with a sound project will find it easier to raise equity from the markets; this way, more entrepreneurs can grow their businesses. Together with a strong capital market, businessmen also need a deep bond market.
While bond issuances have been growing over the years and companies are now mandated to borrow a certain amount from the markets, buyers tend to prefer only top-rated companies. It would be difficult for a newcomer, however solid his project, to tap the bond markets. Most of the debt is privately placed and buyers play it safe. A bigger, deeper bond market would enable much more entrepreneurship.