Significant rise in IPO activity likely to boost credit growth in some sectors: SBI research

05 Dec 2017 Evaluate

Highlighting the importance of initial public offerings (IPOs) presenting a good picture for businesses and corporate, as it represents a better options to raise money, SBI research in its latest report has said that the significant rise in fund raising through the IPO is likely to spur credit growth in some of the sectors. The report said that though there is no direct relation between credit growth and equity raising through IPOs, the years witnessing higher IPOs in general have shown a modest pick-up in credit growth. In the fiscal year 2017-18, domestic companies have raised Rs 49,175 crore between April and October, which is more than the amount raised between FY12-FY16 put together.

The report noted that after the muted performance till FY15, domestic IPO market picked up pace with 70 and 106 companies listed in the last two fiscals. It gained further momentum in the current fiscal with 112 companies hitting the IPO market till October 2017. Particularly, the insurance sector has come to the market this fiscal with four companies alone raising Rs 31,320 crore. The report said if sector-wise IPOs in various years, and bank credit in those sectors are compared, the results are asymmetric e.g. a positive relation between credit off-take and IPO is visible for some sectors with credit off-take picking-up after IPOs in those sectors.

According to the report, the power sector, which raised huge amount from the equity market in FY10 and FY11, witnessed significant credit growth during this period. Similarly mining and quarrying, metals and minerals went to the IPO market in FY10, FY11 and those years witnessed higher credit disbursement in these sectors. However, advances to computer software declined in the FY17 when 8 medium and small software companies raised Rs 2,103 crore through IPO.

SBI research stated that this could be due to such sectors being more determined by global factors rather than domestic and hence a possible pick up in global growth could push domestic credit growth in these sectors with a concomitant lag. Even credit in the food processing industry has lower correlation with IPO. It added that one possibility could be that India has a young population, and consumption growth is mostly invariant with the expansionary or recessionary trends in business cycle. The current upsurge will last as long as the upswing in market continues. Additionally, the performance of the companies, which got listed in recent years, will also play a crucial factor in determining the success of future primary market issuances.

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