The lull has given way to a storm. After a year of waiting on the sidelines, India Inc is raising money with a vengeance.
In the last four months alone, companies have raised nearly Rs 90,000 crore (Rs 900 billion) in equity and debt. And the party looks set to be a long one, with companies planning to raise another Rs 100,000 crore (Rs 1,000 billion) in the next six months.
While some such as Hindalco, JSW Steel, India Cements, Essar Oil, Tata Steel and Jet Airways have already announced plans to raise a combined Rs 70,000 crore (Rs 700 billion), there are many who are redrawing proposals to enter the market to raise money.
The money that has been raised since the beginning of July includes Rs 43,572 crore (Rs 435.72 billion) in equity through qualified institutional placements, initial public offers and rights issues. Around Rs 45,000 crore (Rs 450 billion)have come from debt issues.
The reasons for the fund-raising deluge after the one-year drought are many. For some, it is the fear that the good markets may not last for long and they want to raise money to ensure they are not drained for liquidity like last year.
A Subba Rao, president & chief financial officer of GMR Infrastructure, believes in the fear psychosis theory. "Today there's water, so collect it. Tomorrow, there could be a drought," he says.
This is best illustrated by real estate companies. After their bigger peers like Unitech and DLF raised money, over half a dozen companies have lined up initial public offerings, or IPOs.
Hari Prakash Pandey, deputy general manager (finance) and CFO, HDIL, a Mumbai-based real estate company, agrees. "It is the fear psychology that's driving companies to raise money. There's still fear that something may happen and good markets may not last. Today, a window is available to raise equity. So companies are saying let's go and raise capital," he says.
But others see a more long-term vision than mere fear-psychosis. For them, companies are also raising money to reduce debt, complete existing projects or for meeting their future capital needs.
S Ramesh, COO, Kotak Investment Banking, says some companies, which were not able to complete projects earlier, are raising money to create a buffer, while a few others like Larsen & Toubro are raising money to meet their future needs.
"With consumption picking up, companies realise that they may need to soon invest in new projects," says Ramesh. Some like Tata Motors raised money to refinance debt taken for acquisitions while others are raising money to complete projects on which they went slow in the downturn or because of the liquidity crunch last year.
Real estate companies, which kicked-off the QIP rush, raised equity to reduce debt. "Companies were over-leveraged. In a downturn, even a 1:1 debt equity ratio looked high. As debt comes down and sales pick up, internal accruals could be released for growth," says Pandey.
This will help real estate companies as they were paying interest rates of 12-15 per cent on these loans with annual interest outgo of Rs 400-500 crore (Rs 4-5 billion).
This may not be easy. Aditya Sanghi, managing director, investment banking, Yes Bank, says investors have become choosy and want to back stories which have an outcome. "If 15-20 real estate companies want to raise Rs 1,000 crore (Rs 10 billion), I am not sure if the market is ready for it."
But still the market has enough appetite for companies with strong fundamentals seeking growth capital.
What has helped in this process is the easing up of the foreign currency loan markets in the last few months with the spreads on the Libor (London Inter Bank Offered Rate) coming down. Spreads are the rate paid over the benchmark Libor as the cost of borrowing for overseas bonds.
Indian companies can save 150-200 basis points on interest costs by borrowing in dollars, inclusive of the hedging costs. GMR's Rao says companies can borrow five-year money fixed Libor at an effective cost 9.75 per cent (covered for the interest rate risk as well). Five-year money from Indian banks costs 11-11.50 per cent.
The problem, however, is that not many banks are willing to lend for five years. Most of them do not want to tenure to cross a year.
Besides, the loans are not comparable as no rupee loan is available at a fixed rate for five years. The interest rate on a five-year loan is reset every year. But companies can borrow from insurance companies or mutual funds, or from public markets, like Tata Capital did, at 11.5-12 per cent.
Arvind Parakh, director (business development) & CFO, JSL, says companies that have strong balance sheets can leverage them overseas.
With the convertible bond market overseas opening up, companies are raising money through convertible bond issues. A few like Sesa Goa, Larsen &Toubro and Tata Motors have already raised money through a combination of QIP and foreign currency convertible bonds, or FCCBs.
FCCBs are back in vogue as premiums have gone up to 30 per cent. "Four months back, the premium was low (15-16 per cent) and the coupon was ruling at 5-6 per cent. It did not make sense for promoters as it was a zero-sum game," says Rao. Now, investment banks are recommending FCCB issues as they see good demand and a new set of investors.
The pure bond market is also opening up for Indian companies. Last week, State Bank of India raised $750 million (Rs 3,500 crore) through five-year bonds. Other banks and PSUs may soon raise more. Seshagiri Rao, deputy MD, JSW Steel, says that with three-four issues from banks and PSUs, the bond markets could open up for Indian companies.
(With inputs from Deepak Korgaonkar and Swapnil Mayekar, BS Research Bureau)