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Primary Markets — Raising Toast to New Kids!

21 September, 2010

Rising stock markets and emerging bubbles are not necessarily bad. We may fret about oversupply of paper in primary markets, but look a bit deeper; there is a lot of quality issuance this time. Rising markets are funding these new enterprises and entrepreneurs, thus broad-basing the Indian growth story. The emerging virtuous cycle of growth and profits suggests that rising share prices may be reflecting underlying reality. While the jury is still out on valuations, there is enough visible success around us to pause and Raise the toast to New Kids!

Indian Capital markets are witnessing silent transformation with entry of a new breed of players. Developed world sectors especially in services are accessing mainstream finance. Waste management solutions, water treatment, green energy, Indian movie (Bollywood) value chain, port logistics, retail food consumption, micro-finance, education  are the new world themes making debuts in capital markets. And they are decent size companies with debut market caps at $300m and going into billions – big enough to interest institutional investors. Some of these new players already have a proven track record and have pioneered/virtually defined the sector.

It has been a long hiatus since we last saw emergence of new players on the block which was primarily in telecom, retail, aviation, private banks and IT. Other than these sectors, institutional investors have been content to operate in tried and tested club of established business houses such as Tatas, Birlas, Ambanis, Mahindras, Munjals, Godrejs and such like. Most businesses led by these groups also happened to be in core/traditional sectors.

With general economic growth, traditional businesses are seeing growth and this is now being topped up by the emerging new sectors and players leading to a growth blast. The new kids therefore increasingly represent opportunity and diversification options to investors in public markets.

2010 has been propitious for Indian primary markets.  Earlier this year, domestic food retail sector got defined with successful listing of Jubilant Food Works, the Indian franchisee of pizza Company Domino’s.  The company immediately found favor with Institutional investors on search for India’s aspirational food consumption story. The company has already tripled its IPO price and now commands a market cap of Rs 3400cr or close to $750M. In August another new sector in micro-finance got added with successful listing of SKS Microfinance. SKS was promoted by first generation entrepreneur Vikram Akula and has a market cap of Rs10,000cr which is up 30% since IPO in August.

The New Face of IPOs

This week (Sept 20, 2010), is turning out to be huge for Indian Primary Markets with IPOs by eight companies which are mostly established businesses. At least three of them represent new sector pure plays in areas of waste management solutions, green energy and bollywood. They have also received average to good ratings from credit rating agencies reflecting underlying fundamentals. Just to illustrate:

Ramky – (Crisil Grade 3/5) Ramky is a diversified infrastructure player with leadership in the high-margin water and waste-water and irrigation projects. The company has been promoted by first generation entrepreneur Alla Ayodhya Rami Reddy. The company is raising Rs 530cr with a starting market cap of Rs 2662 cr. In FY 2010, it registered a turnover of Rs 2002 cr having grown at 49% CAGR over last 4 years. The  current order book stands more than Rs 7400 cr.

Eros – (Care grading 4/5) Raising Rs 350cr. Starting market cap of Rs 1600 cr. The company will be the first Studio type (analogous to Hollywood biggies like Warner Brothers, Sony Pictures etc) company in Bollywood which is a key intermediary in the Indian movie value chain spanning production, distribution across the world. Hitherto if one had to play the Indian Bollywood stories, it had to be through investments in diversified media companies like UTV or possibly some listed production houses. Eros would perhaps be most broad based play on Indian movies and could fill in an important sectoral space for investors. It is promoted by the Lulla family which would also be debuting the Indian capital market space.

Orient Green-(Crisil grading 4/5) Raising Rs 900cr. Starting market cap Rs 2421 cr. The company a leading renewable energy developer, plans to scale up its capacity from 209 MW to 1013 MW by end-FY-2013. This would be the first listed Renewable/Green energy pure play, which was till now not available in Indian listed space.  The company is part of the Shriram group.

The other IPOs of unique stories which deserve mention are VA Tech WABAG ( ICRA rating 4/5) who is  a global player in water treatment and solutions business and Techpro Systems (Crisil grading 4/5) engaged in providing turnkey solutions in material handling, ash handling, balance of plant and EPC contracts. Both these companies are likely to have starting market caps of $300m or more.

Positives  About The Fresh IPO Wave

PE players have been significant contributors to these transformations providing funding and mentoring these new businesses in emerging sectors at critical stage of their growth. Ramky received private equity investment from Standard Chartered IL&FS Private Equity, VA Tech Wabag was a management buyout supported by ICICI Ventures, while Orient Green is a renewable asset play whose foundations were laid by Shriram Group in partnership with Bessemer Ventures.

SKS Microfinance received PE funding from Sequoia and Narayan Murthy’s fund Catamaran, while Jubilant Foodworks had a long standing PE investment by J P Morgan. Rising Capital Markets have provided opportunity to some of these PE players to monetize their investments.

IPO’s are also bringing these companies to a new orbit of growth. With high valuations, aggressive business plans are getting funded. The collective growth at macro level has potential to more than achieve the rich forward multiples underlying current market valuations.  Also the increasing adherence to professional management and corporate governance practices are making these new companies perfectly eligible to find favor with foreign institutional investors and their rising inflows.

Post-facto justification of rising markets is most easily done. However, one cannot but take note of new successful enterprises emerging around us. So even as we worry about the present/coming bubbles, let us pause to celebrate arrival of these new kids who are providing legs to macro growth story of this country.

(Sanjay Jain is Director, Taj Capital- a New Delhi-based boutique investment firm.)

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Primary Markets — Raising Toast to New Kids!

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