India Can Handle $35bn Equity Raising... And More

India Inc could see $35bn of capital raising in 2007, more than twice of last year. However, there is no reason to believe this is a deluge yet. Indian corporates can handle this and more
- Deal Digest, August 13

Two very interesting bits of news headline caught the eye last week – one pertaining to the Indian market, and the other to the global market. A consulting firm released a report last week stating the PE investments in India could touch $15bn in 2007. The other news item was about Blackstone’s mammoth new buyout fund of $21.7bn, which reportedly is the largest fund raising exercise by an alternative investment vehicle so far.

The projection that PE investment in India could hit $15bn also implies that PE investments in 2007 will be double that of 2006, and, hold your breath, 7.5 times what we saw in 2005. From $2bn in 2005, PE investments grew to $7.5bn in 2006. So far this year, deal making has been running at around just over a billion dollars a month. So the projection that deal making size will double in 2007 is unlikely to find disbelievers.

Yet, this number will once again raise the question which has been raised with increasing frequency in recent times – how long can be the PE boom last? Do we already have too many PE funds chasing too few deals?

As is the case with most existentialist questions, there are no easy answers to such things. One way is to try to put this number into perspective. Equity raising of all kinds is booming, and the PE number cannot be looked at in isolation from the public equity markets.

The IPO/FPO/ADR/GDR/AIM route will also see a massive increase this year. Most projections on FY08 fund raising from public market route range from Rs 70,000 figure to even Rs 100,000 crore. As this column pointed out earlier, almost Rs 36,000 crore was raised from public equity markets, domestic and foreign, in June itself. July has seen Rs 3600 crore raised from domestic public markets, at least Rs 6000 crore from foreign markets. Almost Rs 46000 crore have been raised in last two months.

In total, equity raising could easily reach cross $32bn [see table], possibly even touch $40bn over 2007, an increase over 2.5x to 3x over the previous year. Let’s take an average number of $35bn, and see if that means an overdose of funding.

Total capitalization of Indian markets is around $800bn. Unlisted limited companies will be much smaller than this, but let’s say their aggregate value is another 10% or so. So the total value of corporate entities could be say $900bn.

So a $35bn fund raising is equivalent to a 3.9% dilution. If you add the fund raising over 2005 and 2006, which was another $22bn or so, then you have a total dilution at best of 6.3% over last 3 years. That isn’t much.

Also, the actual dilution may be lesser than this, since all the money changing hands in the PE space doesn’t necessarily result in equity dilution. For example, if a Blackstone acquires Intelenet, a lot of that transaction is change of ownership, not fresh equity. Some of the projected $15bn of PE investment could well be REIT money, which can go into funding real estate projects, and not in capital infusion into limited companies.

The point here is this – limited companies will end up diluting only around 5.5 to 6% equity from 2005 to Dec’07, or on average, a tad less than 2% per year. This needs to be looked at in context of the biggest bull market and economic expansion in Indian history.

One would say this isn’t aggressive dilution at all. As this column wrote earlier, a 20% dilution at one go can be easily absorbed in a growth economy. That is what Sterlite Ind (SLT) did in Jun’07, and got away with it. CICI Bank of India (IBN) diluted even more.

The bottom line – Indian markets can easily absorb $35bn in a year, including the PE component of $15bn. At this point, there is no reason to believe that the surge in equity raising in 2007 represents an overdose. Indian companies and markets should be able to handle this.

What is the potential for capital raising in future? We feel there is far more scope, but this question involves a new set of arguments, which we can tackle in a future column. Let’s just end by saying, that the entire Indian PE business is still less than one fund of Blackstone. So let’s not yet say that Indian PE or alternative investment space is crowded either.