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Private Equity Exits May Fuel IPO Rush

The number of companies lining up to raise capital in initial public offerings of shares is growing steadily. According to rough estimates, about two dozen companies may have plans to raise about Rs 10,000 crore over four months this fiscal.

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The killing of 129 people in France couldn’t have come at a more inopportune moment for business confidence. Global economy continues to be in a turmoil, Japan has slipped into a recession, the US economy is yet to pick up in a significant manner, and China has moderated, while commodities exporters, and Europe are making desperate attempts.

In India, the scenario is no better with corporate earnings subdued for yet another quarter, exports falling for the 11th straight month, and on the ground growth not getting reflected in GDP numbers. The Sensex too has slipped 14 per cent since an intraday peak of 30,024 in March 2015, and dropped about 6 percent over the past three weeks.

Yet, quite in contrast the number of companies lining up to raise capital in initial public offerings (IPO) of shares is growing steadily. According to rough estimates, about two dozen companies may have plans to raise about Rs 10,000 crores over four months this fiscal. What accounts for this rush?

Is it the recent IPOs by Interglobe Aviation and S H Kelkar & Co that listed at a premium leading to a rush of share sales?

"There was a fair amount of private equity investment in Indian companies in the period 2007-09. A number of such companies which were backed by private equity are evaluating public listing to facilitate exit for PE investors. This is evidenced in the recently completed IPOs and DRHPs that have been filed with SEBI," said Nipun Goel, president and head of investment banking at India Infoline. ``The quantum of equity capital raised through IPOs this year is likely to be more than past few years put together.’’

That also partly explains that most of the potential IPOs are of amounts less than Rs1, 000 crores. Private equity investors may or may not sell a part of their holding during the IPO, yet the listing of shares certainly gives them a window for any future divestment over coming months. PEs typically begin to sell their holdings from the seventh to the 10th year of collecting funds for investment.

"While three of every four companies have PE investors, they do not necessarily sell at the IPOs," said V Jayasankar, head of equity capital markets at Kotak Mahindra Capital Company. ``In the case of Café Coffee Day PE investors didn’t sell anything and in case of SH Kelkar, Blackstone sold just a third of the 32 per cent they own.’’

Still, IPOs do open up a window for the PE investors for any future sale. Soon after the Modi government took over in June 2014, QIP sales rose initially since they need much less time for documentation and sale to institutions. One sees more public issuances now as draft prospectuses get cleared by the regulator.

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Among companies that are planning to sell shares include SSIPL Retail, Larsen & Toubro Infotech, Equitas Holding, Parag Milk Foods, Narayana Hrudayalaya, Matrimoney.com, VLCC Health Care, Dr Lal Path Labs, Teamlease Services, Sandhar Technologies, GVR Infra Projects, Maini Precision Products, GNA Axles, AGS Transact & Technologies, SMC Gloal, Amar Ujala Publications, and Matrix Cellular.
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"`The investor experience in the IPOs over the past 12 months has generally been good with a number of IPOs performing well in secondary markets, including ones by Indigo Airlines, Manpasand, VRL Logistics and Kelkar, reinforcing investor confidence in the markets,’’ said Goel. ``We expect substantial amount of capital to be raised over the next 12 to 18 months.’’

Yet, will it be smooth sailing for promoters? Probably not. Investors are careful with regard to the growth prospects of the company selling shares and the price they seek.

Investors will watch out for earnings and growth outlook for sectors they plan to invest.

Economic recovery so far has been gradual and corporate earnings muted. Signs of changes in rules to ease of doing business, business sentiment, fresh investments, actual on-ground growth and government spending are still tentative and mixed to make a clear judgement.

"Investors will look at what story the company presents and also its growth prospects," said Jayasankar. "SH Kelkar for instance, is a unique company in fragrances, which has entry barriers."

The company’s shares listed at Rs 207.30 after selling at Rs 180, and was trading at Rs 215.15 today.

Investors, who had started shunning making investments in 2012-13, are now readily channelling their money through mutual funds. Investible funds with mutual funds has increased past Rs13.15 lakh crores, compared with less than Rs 7.5 lakh crores as of March 2010. Then, global pool of funds is adequate for Indian equity offerings, especially since India could offer better returns than most developed economies.

"Investors continue to look for quality paper even though secondary markets are volatile," said Goel for IIFL. "Positioning of the asset and valuations and pricing are key determinants of investors’ interest."

Could PSU disinvestment, the joker in the pack, potentially affect IPOs by smaller private companies?

"PSU disinvestment may not impact the smaller issues if they don’t overlap," said Jayasankar. "Also, large PSU sales are likely to attract FIIs that seek larger chunk of shares."

The government has called for bids from eight merchant banks to sell shares for potentially Rs20,000 crores. It may just be the time for investors to place their bets -- cautiously.


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