• $25 billion Amount companies hope to raise through IPOs,according to Deutsche Equities India.
• $14 billion FII inflows into India between January-October 2009. There was an $11.8 billion outflow during the same period last year.
• $34.4 billion Money raised between April-October 2009 through public issues, QIPs, private placements, overseas issues and rights issues. FY09 saw $42 billion raised.

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Last October, when Hyderabad-based Alkali Metals launched an initial public offering (IPO) to raise Rs 26.27 crore, the issue barely scraped through. A year on, the Rs 1,758.15 crore IPO of Indiabulls Power, a subsidiary of Indiabulls Real Estate, has been lapped up by investors. Among them are 12 long-only funds (with an investment horizon of over one year) like Fidelity, Capital International and Nomura.

Indiabulls Power was incorporated in October 2007 and is expected to start generation only in February 2012. Alkali Metals has been around for 41 years. Yet, it was the Indiabulls Power issue that was oversubscribed nearly 22 times. Nomura India Investment Fund even bought 10.8 million shares in the pre-IPO sale. Gagan Banga, CEO of Indiabulls Financial Services, sees this as investors’ faith in his execution capabilities. But, obviously, there’s more to it.

After a long dry spell that began with the Lehman Brothers collapse, money is flowing back once again—thick and fast. India Inc raised $34.4 billion between April and October 2009 through public issues, qualified institutional placements (QIPs), private placements, overseas issues and rights issues. In comparison, around $42 billion was raised in the preceding 12 months (FY08). Of this, the lion’s share, $37.4 billion, was from private placements (see table).

Foreign institutional investors (FIIs) pumped in $14 billion between January and October. They had pulled out $11.8 billion in the same period last year. And IPOs worth $25 billion are in the pipeline, says Deutsche Equities India.

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Money, Money, Money

India Inc raised $42 bn during the whole of FY09, mostly from private placements. In contrast, it has already raised $34 bn in FY10 thus far, from a variety of sources.

Money Raised	2009-10 (till October)		2008-09
Products	Amount ($ bn)	Number	Amount ($ bn)	Number
Public issues*	3.59	17	0.78	22
Qualified Institutional Placements	6.82	41	0.4	2
Private placements (corporate bonds & debentures)	18.04	281	37.38	799
Overseas issues	5.38	22	0.33	14
Rights issues	0.57	16	2.72	23
Total	34.4	337	41.61	860

*Both initial public offerings and follow-on public offerings; All placements include equity, debt and convertibles unless otherwise mentioned
Source: Prime Database

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The BSE Sensex gained 66.5% this calendar year, despite a corrective drop of 8% during the last 12 trading sessions (till November 5). The rupee has appreciated nearly 10% against the dollar since its low of Rs 52.03 in March, on the back of strong capital inflows.

Dry land is flooding once again. Companies are raising money, and will, hopefully, start investing soon. The question is: will this kick-start the virtuous cycle of growth again?

Money Heals

The first wave of liquidity is unlikely to accelerate growth right away; initially it will only hasten India Inc’s recovery. But it has come in the nick of time. Hit by the slowdown, India Inc was gasping for capital. “Money raised was used more for restructuring, repaying and refinancing debt than for capital expenditure”, says Ajay Dwivedi, Director, Crisil Ratings, the Indian subsidiary of Standard & Poor. Crisil, in its portfolio of 2,700 companies, is still seeing more downgrades than upgrades. “The recent capital raising has been done to redeem maturing liabilities and to repair geared balance sheets,” says R Shankar Raman, Senior Vice-President (Finance & Legal) of engineering giant Larsen & Toubro (L&T).

Capital was raised to redeem maturing liabilities and repair geared balance sheets.R Shankar Raman, Senior V-P (Finance & Legal), L&T

Tata Motors is a good example. Only months ago, it was arguably overextended as a result of the Jaguar-Land Rover acquisition. Now, Tata Motors has raised funds through GDRs (global depositary receipts) and FCCN (foreign currency convertible notes) to repay its original bridge loan of $3 billion, taken for the buyout. The company raised money through many modes: rights issues (Rs 4,200 crore), bonds (Rs 4,200 crore), sale of its shares in Tata Steel (Rs 1,700 crore) and GDRs and FCCNs (Rs 3,500 crore).

“It’s been a double bonanza for India Inc,” says Rupen Patel, MD, Patel Engineering. “Raising money by placing equity has seen companies beef up their overall cash position and strengthen their balance sheets, thus giving them an option to raise debt in the future.” Even though a substantial proportion of the recent capital raising (especially in the real estate space) was aimed at de-leveraging balance sheets, investments for growth will eventually ensue.

The money has been used more to restructure and repay debt than on capex.Ajay Dwivedi, Director, Crisil Ratings

Already, corporates like Vedanta Group and some power companies have raised capital to implement large expansion plans. Says Patel: “We achieved financial closure for our build-operate-transfer (BOT) road project, AP7 in Andhra Pradesh, in a tough market.” In April 2009 the company raised funds through external commercial borrowings (ECBs) and recently also garnered Rs 344.32 crore through fresh issue of shares to qualified institutional buyers (QIBs). “Select transactions have happened (other than in the banking space) to pursue growth opportunities,” says L&T’s Raman. “Investors will pick quality deals priced appropriately”, adds Sanjay Sharma, Managing Director-Head, Equity Capital Markets, Deutsche Equities India.

The Flows Continue

It was foreign capital inflows that fuelled economic growth and pushed the Sensex to its all-time high of 21,206.77 on January 10, 2008. Inflows are driving the markets up this time too. After a massive sell-off in 2008, in the aftermath of the global credit crisis, global investors are once again pumping money into emerging markets. The Morgan Stanley Emerging Market index (MSCI), the benchmark used by most international fund managers, has gained 62% in the first 10 months (till October 29) of 2009, as against a fall of 55% in 2008. Leading the charge were BRIC countries—India (79% return), Russia (98%) and Brazil (110%). In the same period, developed markets, represented by the MSCI World Index, gained 20%, against a 42% fall in 2008.

There is a real risk that BRIC countries will be affected by slower growth in the G7.Alok Sama, Founder & President, Baer Capital

As US treasury yields fell to almost zero, equity assets became attractive once again. Against an outflow of $70 billion in 2008, Asian equity markets have seen an inflow of over $35 billion (year-to-date.) Emerging markets are attracting investments for many reasons, none of them new: recovery in domestic demand, improved credit conditions, moderate consumer spending, debt-to-GDP ratio, stronger banking systems, and better employment numbers.

But foreign inflows come with their own risks. Even as it promises to fuel growth, it also raises concerns of asset bubbles and inflation… and of good money going into bad projects. India is particularly vulnerable.

India is over-dependent on foreign inflows and has a relatively illiquid stock market. Only a few billion dollars moving in or out can cause a lot of volatility. That’s what happened immediately after the Lehman collapse. Says Alok Sama, Founder and President, Baer Capital, “Economies that ran substantial current and fiscal account deficits, or companies that relied on external capital to finance their growth—both apply to India and its corporate sector—were penalised.”

The third risk is of valuations running too far ahead of fundamentals. The last time stocks in developing countries got expensive was October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value. But that’s not the case today—not yet, anyway. According to Bloomberg data, India (BSE Sensex) trades at 19 times earnings, compared to 21 times for the US market (S&P 500). That needs to be read in the context of economic growth forecasts—the International Monetary Fund estimates developing economies will grow 1.5% as a group in 2009 and 4.7% in 2010, while developed economies will shrink 3.8% in 2009 and grow just 0.6%, the next year.

The US has grown (only) because of fiscal sops, such as cash-for-clunkers and TARP.Anubhuti Sahay, Economist, Financial Mkts, Standard Chartered Bank

Still, there is enough caution in the air. Most emerging market indices, after touching their respective 52-week highs in early October, are now witnessing a correction. Says Sama of Baer Capital: “While emerging market fundamentals are relatively solid, there is a real risk that the BRIC countries will get dragged down—in varying degrees—as a result of slower growth in the G7 economies. And, as always, markets like India will suffer in case of any dislocations in global liquidity and risk appetite. These markets are not for the faint-hearted.”

Nevertheless, the relatively poorer state of affairs in the developed world will keep investors interested in emerging markets. Says Rakesh Valecha, Senior Director, Corporate Ratings, Fitch Ratings: “Contraction in GDP is over for many of the advanced economies… While a double-dip recession cannot be ruled out, we currently see a period of anemic growth until 2011.”

The US has just announced it grew 3.5% in the last quarter, ended September 2009. But this is stimulus-driven. “The growth in the US is the reflection of the fiscal packages, such as cash-for-clunkers and TARP (troubled asset relief programme),” says Anubhuti Sahay, Economist, Financial Markets, Standard Chartered Bank. “We don’t see high growth in the US, which could augur well for emerging markets, especially India,” she adds. Sharma of Deutsche Equities India sums up the story: “Fund flows into emerging markets are likely to continue until the US and Europe recover.”

Fund flows into emerging markets will continue until the US and Europe recover.Sanjay Sharma, MD-Head (ECM), Deutsche Equities India

The Growth Puzzle

That brings us back to the question we started with. Can the inflows kickstart growth all over again? Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, sees a clear link between foreign investments and growth. “India will be one of the fast-growing parts of the emerging market, with a lot of soft infrastructure to attract foreign investors,” he said, speaking at the Outlook Money—NDTV Profit Awards late last month. “India will emerge from this decade firmly established and capable of sustainable long-term growth of somewhere between 8-9%.”

“Considering the level of capital formation required to keep our economy growing in the 6-7% trajectory, the cycle can be expected to continue unless some large-scale meltdown occurs in the financial markets,” adds L&T’s Raman. L&T is optimistic about a continuing recovery over the next 12 months, over which time it will focus on completing projects begun earlier.

Like L&T, many companies are seeing their business and finances improve. They are thinking about investing again. During the July-September quarter, the consolidated net profit of 2,503 companies jumped 42%, even though sales dropped 6%. The rise in profits largely came on the back of other income and a fall in commodity prices. This could be the beginning of the virtuous growth cycle all over again—better performance will help companies raise funds, rid themselves of the baggage from the slowdown, and start investing all over again.And the cycle goes on.