Stocks zoom despite record equity issuances, beating historical trend

Trend challenges theory that large share sales suck out secondary market liquidity, say analysts.

Dalal Street has witnessed record equity issuances over the past four weeks. Share sales worth Rs 61,000 crore ($8.1 billion) have been lapped up by investors, without hampering secondary market prospects.
 

In fact, stocks have climbed despite such these issuances, challenging the theory that large equity issuances suck liquidity out of the secondary market. 

Though large primary issuances have indeed, in the past, weighed on share prices in the listed universe, market players say it is a different story this time.

“Stock markets have done well because of these large issuances, not in spite of them,” said an executive with a US-based investment bank. “Given the overall weak sentiment caused by the pandemic, the tremendous response to these issuances has been a sentiment booster,” the executive added.

The indices have rallied 13 per cent since May 18, shrugging off grim economic forecasts, rating downgrades, and rising Covid-19 cases. 

Further, stocks of all companies that have gone for share sales are trading way above their selling price.

Reliance Industries concluded its mega rights issue on Wednesday, which has seen a good response. 
 

The block deal in Kotak Mahindra Bank on Tuesday attracted over 120 buyers, adding to the success of its qualified institutional placement (QIP) last week, which saw more demand than shares on offer.
 

Bharti Airtel’s Rs 8,400-crore share sale, too, was lapped up by investors though the stock was hovering near its all-time high. 

 

Hindustan Unilever, which kicked off the large share-sale issuances, saw huge buying interest despite the same being India’s largest-ever block deal, at Rs 25,000 crore.

People in the know say the investor appetite demonstrated in these issuances is giving confidence to firms for lining up share sales or fundraising.

Experts, however, say the share sale window may not be available for all companies.

“There is always liquidity available for good quality paper at attractive valuations. The current share sale streak is not broad-based; it is restricted to a few large entities. While it is to reduce debt for RIL, for Kotak Mahindra Bank it is to meet with RBI regulations. While such fundraising activity even during these times bodes well, I will be surprised if the trend continues or gets broad-based,” said Pranav Haldea, managing director of PRIME Database.

Investment bankers say they are having initial discussions with several firms to launch share sales. However, confidence level is not too high beyond the blue-chip universe, they say.

“It is only the top entities that are able to do such secondary deals. Companies that are not in the top 100 will find it challenging to do a rights issue or QIP. The positive aspect of such transactions is that there is enough liquidity. Investors have enough money or investible surplus, but people are waiting for things to improve. Only the larger firms are attracting investment,” said Pranjal Srivastava, an independent capital markets professional.

Market players said the outperformance by the broader market, seen in May, has to persist if the share sale trend has to extend to companies beyond the blue-chip universe.