>Large equity issuance in the pipeline again (BNP PARIBAS)

• In the remainder of FY10, we expect USD11b primary equity issue; including PSU divestment, it could go up to USD14-15bn.
• This could lead to short-term stagnation in the secondary market, like in the mid- May to late-August period.
• 62% of new equity coming in real estate, 18% in power; secondary market performance of these sectors could be under near-term risk.

■ Previous spate of equity issue had stagnated the market
During May-August 2009, around $9bn primary equity was raised, which absorbed $6.6bn FII
money. Consequently, FII inflow into the secondary market during this period was only $1.8bn,
even though total net FII inflow was $8.4bn. As a result, after the election result step-jump (17.3% on 18 May), Sensex stayed virtually flat until the third week of August (up 5% between 18 May and 20 August). In fact, during June, July and August, FII inflows into the secondary market were negative, even though total net FII inflows were to the tune of $4bn.

■ Equity issue comes after secondary market performance
Our correlation analysis shows that primary issuances lag stock market performance by 2-3
months. This is to be expected intuitively – strong return from market bolsters companies’
confidence in issuing equity. As IPOs start coming in, FIIs divert their interest to the primary
markets and take money out of secondary markets, leading to stagnation in the secondary
market, such as in the mid-May to late-August period.

■ Another large equity issue pipeline approaching
In the remainder of FY10, we see another $11b equity issue pipeline. Including potential dilution
of the government’s stake in PSUs, the pipeline could increase to $14-15b, which could lead to
another phase of stagnation in the secondary market in the near term.

■ Sectoral concentration and quality of issues a concern
Unlike the previous round of issues, in this round, there are several second-tier companies and
first-time issuers. Till date in 2009, almost 80% of the $10.27b equity issue has come from four
sectors – banks, oil & gas, real estate and power. Real estate and power have contributed almost
50%. In the future, out of the $7b announced issues, real estate alone is likely to account for
62%, and real estate and power together will account for 80%. We believe that such sector-wise
concentration poses risks for the secondary market performance of these sectors.

■ Longer-term positive for capex and balance sheets
The first wave of equity issues repaired the balance sheets of most companies with stretched
balance sheets. Even in the second phase, we believe some companies (particularly in real
estate, retailing) would target balance sheet repair with equity money. But in many other sectors
(e.g. banks, power, metals and mining), additional equity is likely to be used for expansion
projects. This has positive implications of capex revival as end-user demand strengthens, or
inorganic expansion.

To see the full report: INDIA STRATEGY