Companies in India are flocking to raise funds through bonds and equities to shore up cash buffers, as they look to ride out the coronavirus pandemic, leading to a surge in capital market flows.
“Companies are raising capital to safeguard against the Covid impact, pay their debt as well as to protect and improve their balance sheets,” says Ajit Mishra, vice president of research at Religare Broking in New Delhi.
The primary debt market in India, Asia's third largest economy, recorded a 65 per cent surge in fresh issuances to 2.85 trillion Indian rupees ($37bn/Dh139bn) between April to July 2020 compared to the same period in 2019, according to Acuité Ratings and Research. Primary equity issuances, during the period rose 3 per cent on annual basis to 899bn rupees.
Monetary stimulus programmes introduced by the Reserve Bank of India (RBI) during the pandemic to ensure adequate systemic liquidity and stability in the financial sector have also helped boost flows into capital markets, says Sankar Chakraborti, group chief executive of Acuité Ratings and Research.
“This has helped not only larger corporates but also smaller ones along with non-banking companies to raise a record volume of debt,” he adds.
Low interest rates are also increasing the appeal of raising funds through bond issuances, analysts say.
“The fundraising has been quite a success for the companies as they offered lucrative discounts to lure investors,” says Mr Mishra. “It is not surprising as the pandemic had affected businesses drastically, which has strained the companies' liquidity as well as their debt. To reduce possible pressure in the future, companies are raising funds [now] to maintain adequate liquidity [buffers].”
So far, a total of 91 companies in India have issued bonds, beating last year's total of 61 companies as the country grappled with a credit crunch, according to Bloomberg.
Selling bonds is currently cheaper than getting a loan in India, as banks hold back on lending to bring down their debt ratios. The average yield on a top-rated three year note is 221 basis points cheaper at 5.09 per cent compared to getting a similar loan from India's largest lender State Bank of India, according to Bloomberg data.
A series of stimulus measures rolled out by India's financial policymakers to help soften the pandemic's blow to the economy has further lowered the borrowing costs on bonds.
The emergency interest rate cuts earlier this year have already pushed the borrowing cost to its lowest in two decades. The RBI is buying and selling government bonds in what is known as an 'Operation Twist' and policymakers have also launched partial credit guarantee scheme to address liquidity issues faced by non-bank lenders.
Issuers this year include information technology giant Wipro, which has tapped the market with its debut local currency bond. Yoga guru Baba Ramdev-owned Patanjali Ayurved, a fast moving consumer goods company that sells products ranging from food to toothpaste, has forayed into the debt market.
The Patanjali debut into the bond market in May was a huge success. The issuance of 2.5bn rupees of debentures was fully subscribed within minutes of the launch, according to the Press Trust of India.
“This shows the excitement and faith of investors,” the news agency quoted Patanjali's managing director Acharya Balkrishna as saying at the time.
As well as bond markets, corporates have also been rushing to shore up their cash buffers through equity markets.
Analysts say that there has been a surge in appetite for equities in emerging markets – including India – as central banks globally have boost liquidity during the pandemic.
In India, this could mean that 2020 could be a record year for share sales as well, following a flurry of equity fundraising activity this month in particular. Reports from Prime Database reveal that Indian companies have already raised 1.32tn rupees this year through equity markets including initial public offerings and qualified institutional placements, compared to a record of 1.66tn rupees raised through the entire of 2017.
Companies' efforts to secure fresh funds come as India's economy is expected to go through a rare contraction this year due to the impact of the coronavirus pandemic and subsequent lockdowns that have taken their toll on business activity. According to Care Ratings, India's gross domestic product is likely to have contracted 20 per cent in the April to June quarter. With the number of confirmed Covid-19 infections in India at around 3 million and cases still on the rise, there is little optimism about economic activity turning around in the short term.
As banks in India brace themselves for potential loan losses in the wake of the pandemic, they have been actively raising funds to strengthen their balance sheets.
India private sector lenders including ICICI Bank, HDFC and Axis Bank, this month raised almost 350bn rupees in the space of a week through qualified institutional placements of equity shares (QIPs).
ICICI Bank on August 15 said it had raised $2bn (Dh7.34bn) of equity capital after completing its allotment of shares.
“The enhanced capital buffers will support the bank's credit profile in these times of economic uncertainty,” analysts at Moody's wrote in a research report. “The allotment is credit positive for ICICI Bank because it will improve its capital position. This is an important development because the ongoing economic slowdown exacerbated by the disruptions from the coronavirus outbreak, will have a negative effect on the bank's asset quality and pressure profitability and capital.”
However concerns about businesses’ ability to repay their debts in the wake of the pandemic persist.
“This [year] will be the weakest economic performance in the past four decades and will have a significant near-term effect on the cash flow of bank borrowers and, consequently, their ability to repay loans,” Moody's says.
On Thursday, the board of Mumbai-based private lender RBL Bank also approved an issuance of more than 88 million preferential equity shares at 177 rupees per share, as it sought to strengthen its capital base.
Blue chip companies including Reliance Industries, the conglomerate controlled by Asia's richest man Mukesh Ambani, and Piramal Enterprises have also successfully raised funds through equity capital markets this year.
It is a trend, which analysts say, will continue against the current economic backdrop.
“[With] regards to equity [deals], we have seen a large volume of fundraising through rights issues or QIPs by private sector banks and large non-bank financial companies,” says Mr Chakraborti. “We believe that such a trend will continue. In the case of debt, a significant volume of debt has been raised by the non-banking sector including non-bank financial companies and housing finance companies.”
Bekxy Kuriakose, the head of fixed income at Principal Asset Management, however says investor appetite is for “lower maturity products in the debt categories [which are] perceived to be safer”.
She adds that there is “renewed confidence” in debt markets “as the RBI continues to take measures to boost liquidity and keep rates low”.
There there are also signs that some investors are willing to bet on riskier assets.
“Interestingly, we have seen an appetite for lower-rated instruments in recent months, driven by RBI or government driven programmes,” says Mr Chakraborti. “[But] higher rated bonds are in greater demand.”
He adds that although these funds are much needed during the current crisis, the impact of such capital flows may not necessarily be positive for all aspects of the economy.
“The challenge is the inherent volatility in such flows. Along with the stimulus programmes they also lead to higher money supply and inflationary tendencies, which might reduce the effectiveness of various monetary and fiscal programmes,” says Mr Chakraborti.
