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Indian capital market on the mend
September, 01st 2009

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker

July looks like a flash in the pan. Capital raised by companies shot up to Rs. 302 billion. That would be the highest amount raised by companies in a single month so far.

It may not be possible to keep up this pace of funds mobilization over a long time. But it looks like the beginning of a significant turn in the capital market.

Apart from the volume, what is unusual about the capital raised in July is that the bulk of it was collected by issue of shares in the domestic and overseas markets.

17,763 crores of rupee funds may not be very unusual. But almost an equal amount raised overseas is exceptional.

The capital market was down from October to February when the Sensex had plunged below 10,000. The investors, including both institutions and individuals, suffered severe risk aversion and lost their taste for equity.

Whatever investment that took place in these five months had to be funded mainly from the debt market. On average, debt constituted nearly 70 per cent of the total capital raised.

Companies prefer equity to debt. Dividend is not a cost the way interest is. Over the years, the equity:debt ratio has increased and currently is about 1:0.7. Debt and equity are substitutable only over a small range. The market for IPOs/FPOs is therefore critical for corporate investment.

The best year, so far, for easy funding of investment was 2007-08. Capital raised exceeded Rs.2.1 trillion, about 85 per cent of which was funded by issue of fresh equity in the domestic market. With the collapse of the market in 2008-09 companies were unable to raise even half the amount, the bulk of it from debt.

Since last March the stock market has been on the bounce. In the five months since there has been a 50 per cent increase in share prices and a significant revival of investment in equity.

In July, more than 80 per cent of the capital raised was from equity. About a half was raised in the domestic market and the rest overseas. The overseas capital was raised mainly by issue of ADRs and GDRs by three large companies.

Indian companies, both Government and private, have huge pending investment and are frantically looking for equity funds for investment. That investment can be funded only if the stock market remains buoyant. For that companies have to earn higher profits because the P/E multiple has already crossed 21 which is the average for the last 10 years.

In the quarter April-June, PAT was up only 8 per cent against 30 per cent two years back. Chances are that profitability will improve with the pick up in consumer demand and industrial production.

Hopefully July may not be a flash in the pan but a signal of a change in market conditions which may help companies raise enough money for investment. Going by the trends companies should be able to raise Rs.2.5 trillion in the current year.

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