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India's Capex Cycle Expected To Remain Robust Next Five Years, Says Jefferies

Expected equity supply for CY24 is approximately Rs 5.31 lakh crore. This is approaching the peak of the last decade, the brokerage said.

<div class="paragraphs"><p>Source: Unsplash</p></div>
Source: Unsplash

With India's capital expenditure cycle expected to remain robust over the next five years, the supply of equity is likely to stay elevated, according to Jefferies.

Well-functioning equity markets support 7% economic growth and are also vital for improving the capital expenditure cycle and driving business innovation. Existing opportunities for companies can help launch new ventures and reduce high levels of debt. Some promoters have reinvested through various stock holdings, it said in a note.

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The expected equity supply for calendar year 2024 is $64 billion (approximately Rs 5.31 lakh crore). This is about 1.4% of the market capitalisation and is approaching the peak of the last decade, the brokerage said.

Analysis of around 200 deals year-to-date showed that over 40% of the supply came from foreign promotors as private equity firms exited, the note said.

These deals, which are well received, include 115 block deals, providing an average return of 8 percentage points higher than MSCI India year-to-date. This equity raising fuels the sustainability of the capital expenditure cycle. The MSCI India has delivered 19% returns year-to-date in spite of a large equity supply, Jefferies said.

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Equity Supply Trends Of FY24

The equity supply in the financial year 2024 was 1.6%. That is slightly below the calendar year to date, 2024. Data from the past 15 years indicates that the average equity supply was lower at 1% of market capitalisation, but stronger markets provided a 2% equity supply, Jefferies said.

Higher Exits From Foreign Investors 

The analysis of 115 block transactions by Jefferies aggregating to $22 billion (approximately Rs 1.84 lakh crore) during the first half of the calendar year 2024 shows higher exit by promoters (62%), compared to private equity firms (38%). Foreign multi-national companies reducing stakes in Indian firms have added to private equity exits, the note stated.

Foreign exits through block deals amounted to $14 billion (approximately Rs 1.16 lakh crore) during the first half of 2024.

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Good Sectoral Diversity

Of the 10 largest deals exceeding $0.5 billion year-to-date, seven were block transactions. Four of the 10 deals originated in the telecom sector.

Equity flow has come from multiple sectors, including consumer discretionary, industrial, utilities, financials, and healthcare. They raised over $5 billion (approximately Rs 4.15 lakh crore) in the past 18 months. But large banks have not yet addressed major fresh issues, Jefferies said.

Strong Domestic Inflow Compared To FII  

Domestic mutual funds have seen inflows of $26 billion (approximately Rs 2.16 lakh crore), according to AMFI data, complemented by direct retail purchases in equity markets amounting to $10 billion (approximately Rs 8.3 lakh crore) and other local sources such as insurance and pension funds. Although FPI flows were modest on a net basis in the first half at $0.3 billion (approximately Rs 2.49 lakh crore), the primary market experienced more significant inflows from FPIs totaling $4 billion (approximately Rs 3.32 lakh crore), it said.

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