Indebted firms hit bullish Street to raise funds by diluting equity

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Several private firms want to pay off debt by raising up to $5 billion this year through share sale, emboldened by a surge in the stock market and an anticipated economic recovery.

Leading the equity issuances in the private sector are highly leveraged firms such as Adani Enterprises, JP Associates and others in the capital-intensive industries such as infrastructure, metals and telecom, bankers say.

These companies borrowed heavily in the past few years, when the economy was one of the fastest growing in the world, but were squeezed by the slowdown in growth last year and the slide in the rupee to record lows.

In most cases, banks stopped giving fresh loans to these indebted companies, whose loans often exceeded their equity several times over, leaving them with few options but to tap the equity market to raise money to reduce their debt.

“There will be a stampede of companies going to the market and trying to reduce leverage to take advantage of this some kind of Modinomics,” said Eric Mookherjee, a Paris-based fund manager at Shanti India, which manages Indian stocks.

“The access to capital is much easier now, and you need to clean up your balance sheet before you get into the investment mode again. So, the engine has now been started.”

Bankers say 2014 is poised to become the best year for equity offerings in India since 2010, which saw $24 billion raised by public and private companies.

In 2014, PSUs are expected to raise up to $6 billion via share sales, which, in addition to the $5.4 billion already raised in the first-half of the year and the anticipated issuances by the private sector, would bring the total amount to around $16 billion, according to investment bankers’ estimates and Thomson Reuters data.

The rush to raise capital could gather speed if the budget on July 10 paves the way for a revival of the economy, bankers say. Some bankers, however, cautioned that ‘Modinomics’ may not provide instant revival, meaning indebted firms, whose fortunes are linked to the domestic economy, may see a delay in the pick-up in earnings growth.

For now, companies are pressing ahead with raising funds. Jaiprakash Associates and GMR Infrastructure, two of the most indebted mid-sized companies, on Thursday raised $250 million each by selling shares. The companies will use the funds to repay some debt. Jaiprakash has a total debt of $10 billion, giving it a debt-to-equity ratio of 5.9 times compared with an industry average of 0.69, while GMR with debt of $6.5 billion has a ratio of 5.1 times.

The share offerings by the two companies came a week after RComm raised $800 million in India’s biggest share sale since the new government assumed office.

At the end of 2013, some 37 per cent of Indian corporate debt was owed by companies whose earnings were not enough to cover interest payments, up from 34 per cent in July-September, according to Credit Suisse.

The weakening rupee also substantially increased the rupee value of outstanding dollar debt — factors that weighed on the balance sheet of several companies.

Since the Modi government took office, however, the outlook for the economy and corporate earnings growth has improved. The average revenue of 24 companies in the infrastructure sub-index should rise 10.3 per cent in this financial year to March from 8 per cent last year, according to Thomson Reuters data.

“The worst is over. The companies’ operating performance has bottomed out,” said Deep Mukherjee, senior director, corporate ratings, at India Ratings & Research, a Fitch unit.


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