How can we tell if we are already in a bull market?
Yes, the frontline Nifty Index is up over 11% from its lows in September 2019, but that isn’t a great indicator. The Nifty was up close to 350 points between 1st Jan 2018 and 30th Sep 2019, but the top-2 performing stocks accounted for 450 of those points (yes, you read it right. Stock number 3 to 50 cumulatively contributed more than a negative 100 points).
Off late, the stock returns have been more broad-based. Within the BSE-500 Index, more than a third of the companies have managed to outperform the index since its lows in Sept 2019; close to 15% of those companies have even returned twice the index returns. Yes – that is an important feature, but even that is not it.
The tell-tale sign of a bull market is the heightened willingness of the promoters to raise capital, and the willingness of the markets to fund it. For the rally in the equity markets to sustain, one needs the supply of capital (from domestic and foreign institutions) to be much higher than demand for capital (from corporates looking to raise money, government looking to divest stakes or a group of shareholders looking to cash-in on an investment).
From that standpoint, in CY2019, companies have raised only INR118b in initial public offerings compared to INR312b in CY2018. When we combine the Qualified Institutional Placements (or QIP), the picture for the year does not look as bleak. Nevertheless, we are still way short of CY2017.
Demand of capital
Now that the market seems to have shown a willingness to fund capital, let’s look at the willingness of participants to demand it. As per our calculations, we expect over INR2 trillion of paper to come to the markets over the next few months. Let’s look at the individual components separately.
a) Supply of paper by the government of India
The biggest supplier of the paper is likely to be the government of India. The recent tax collection data shows that the fiscal deficit for 6 months has reached c93% of targeted deficit for the year. That itself would not have been alarming, had the corporate tax cuts not been announced.
But since the tax cuts have been announced, we estimate that the centre maybe staring at a shortfall of INR500b, even after accounting for the excess RBI dividend.
Compared to the originally targeted divestment of INR1 tr, we note that the government has so far raised only INR174b. To make good on the originally targeted divestment, we are looking at a capital raise of INR876b, which may likely increase to INR1.4 tr if the government decides to make good on the tax collection shortfall.
b) Follow on offer to reduce stake to 75%
We estimate that FPO of over INR215b will have to happen over the course of the next few months. The initial public offerings that happened by March 2018, in theory, can be delayed for a few more months as shown in exhibit below, but in practice, it is unlikely that the promoter group will likely wait for the last possible month to bring the public shareholding up to required levels.
c) Risk capital raising
In addition, according to media reports that there are several companies in the fray to raise risk capital from the markets, totalling to over INR227b. They are listed below.
Supply of capital
Right, so we are looking to raise over INR2 trillion over, say, the next few months; but is that really that large? It would seem so, considering that over the last decade, the highest annual flow from domestic and foreign providers combined has been just over INR1.4 tr.
While the demand for capital is likely to cross INR2 trillion over the next few months, the supply of capital needs to be reassessed. Although the financialization of savings (assets moving away from physical assets and into financial markets) is ongoing, historically, it has not yet resulted in a number large enough to fund the demand of capital that we seek.
Take into consideration that (a) overall savings rate in India (both corporation and households) has slowed down over the past few years, and (b) the individual flow of capital into equity mutual funds/life insurance does track the recent returns. Given that the equity returns (from the broader markets) over the last two years have remained subdued, the incremental flows might not be as easy to come by.
The thesis of bull markets will likely get severely tested in its ability to help supply over INR2 tr to the seekers of the capital. It will be interesting to see if the recent broad basing that we have witnessed in the markets will likely continue if these companies indeed manage to raise the equity capital that they seek.
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