Companies may use IPO market boom to meet credit demand
"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 capital market,” said Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI.
A rise in the number of companies using the initial public offering (IPO) route to raise capital in this fiscal shows investors' appetite, and it also hints at the possibility that these firms may use the market for their credit revival, said a report.
In the IPO market, which remained at subdued level in both numbers and size between FY12 and FY15, the IPO market is on upswing, companies have raised about Rs 49,175 crore in just seven month of FY18--between April and October.
According to the SBI Ecowrap report, it was known that this market performed better before FY12, as companies raised a whopping Rs 46,121 crore and Rs 49,438 crore in FY10 and FY11.
Looking at the data, it can be said that upside trend in the IPO market started from FY16 and FY17 and rose to Rs 49,175 crore between April and October 2017.
On sector-wise performance, companies from power sector raised the most by entering into IPOs. From FY10 till October 2017, a total of 14 companies have opted this route to raise about Rs 43,921 crore.
In the insurance sector, just 4 companies managed to raise Rs 31,320 between FY10 and October 2017, while metals and mining sector, which took third spot with 9 companies, raised Rs 26,479 crore, finance sector with 50 companies raised Rs 25,595 crore. The construction segment with 50 companies however raised Rs 16,664 crore during this period.
Other sectors were: pharmaceuticals (14 companies) raising Rs 5,858 crore; engineering (24 companies) raising Rs 5,501 crore; food processing (18 companies) raising Rs 4,741 crore and media-related segment (22 companies) raising Rs 4,237 crore during the period.
Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India said, "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 capital market.”
Ghosh further said, “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 the Moody’s."
Ghosh believes that the recent rise in secondary market has further encouraged many companies to hit the equity market for capital in search for better valuations.
Last month, both Sensex and Nifty have touched an all-time high of 33,865.95 and 10,490.45 respectively. With this, both the stock exchanges have given over 20% return on yearly basis.
Two companies namely Cochin Shipyard and Avenue Supermarkets have proved this year to be the appetizer for the equity market after a lull of almost 7 years when Coal India received bids of Rs 231,031 crore in November 2010 compared to it's issue size of Rs 15,199.44 crore.
Avenue Supermarts, parent company of retail chain D-Mart, continues to be a favourite of investors, as the company, which got listed on March 21, 2017, raised a whopping Rs 137,277 crore till now compared to its offer size of just Rs 1,870 crore.
Cochin Shipyard, which got listed on August 11, 2017, managed to bag Rs 109,348 crore as against issue size of Rs 1,442.01 crore.
Ghosh said, “Rise in IPOs definitely 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 IPO market.”
“If they give reasonably decent returns to investors with their average price remaining above their listing price then only it is going to remain attractive source of investment,” he added.