The liquidity game on Dalal Street: The rise of the phoenixes?

Liquidity It has magical powers. When you run a deficit, you can plunge an otherwise sensible company into insolvency. On the other hand, when you have a surplus, you can magically save an otherwise insolvent company from the brink of bankruptcy. Many examples come to mind. But those that cause great astonishment are the stories of two Anils. One is the youngest descendant of the Ambani family, long forgotten. And the other is the metal magnet of vedanta (Anil Agarwal). It’s fascinating to see how the high tide of liquidity has brought them back into the spotlight from the brink of collapse.

Starting with Reliance Power, the story was a rollercoaster ride for investors. In 2008, it made a stunning debut in the markets with a meteoric listing that saw its share price surge to an all-time high in market capitalization that was almost approaching the Rs 1.0 trillion mark, a rare feat. common in those days that belonged to the elite few. But soon the cracks begin to appear. Regulatory hurdles, project delays, cost overruns and changes in coal policy hit the company hard. The situation deteriorated further when the ILFS crisis shook credit markets in 2018, leaving many companies unable to refinance their debt. Burdened with huge unsustainable debt and faced with enormous challenges in project execution, in classic textbook style, liquidity problems gradually began to push Power of Trust on the verge of insolvency.

At one point in 2020, its market capitalization fell below Rs 500 Cr, relegating it to the microcap category, a group often seen as pariahs in the investment community. It is another matter that this microcap group has become a glorified group that is loved by one and all in the current bull run, although one is not sure how long this fantasy ride would last for the so-called SME stars.

Fast forward to 2024. When everyone thought it was all over for the ADAG group, a big surprise came when it announced to the stock exchanges last week that it had successfully cleared all its dues to now become a debt-free company. It doesn’t stop here. Next comes QIP (Qualified Institutional Placement) fundraising for Rs 1,500 Cr+ for institutional investors at a premium. Sure, it will be exploited, as we have witnessed in many recent QIPs. Since this news was published, the stock has been on a continued freeze higher to take the market cap to more than 44 times from its lows it hit in 2020.

This is a classic story of what liquidity or lack thereof can do to a company. During the ILFS crisis, it was on the verge of bankruptcy when liquidity was cut off and has now risen from the ashes like a phoenix thanks to the rising liquidity in the markets. The same manual is now being drafted for another failed venture of the group, Reliance Infra. With infrastructure and energy being the hot sectors in the current bull run, it will not be a surprise if the youngest scion’s fortunes experience a dramatic rebound, reviving his legacy.

Now, turning the page on the metal magnet, although less harrowing, is interesting for curious investors. It wasn’t a sensational, racy story about a bankruptcy-and-return-to-business scenario. Still, it was stitched with many twists and turns that kept the audience on the edge of their seats. Not long ago, it was facing default from promoter-level holding company Vedanta Resources due to its inability to refinance foreign debt. With the commodity cycle on its back, India-listed arm Vedanta resorted to excessive leverage to send dividends to promoters to fund the holding company to repay overdue debt payments. Investors were able to see through the devious designs behind the high dividend payments that were financed by debt at the locally listed arm that already had bloated debt on its balance sheet. This led to a disorderly exit from investors, causing the share price to plummet in October last year. As fate would have it, the misfortunes did not last long, thanks to the easy money that could be obtained with QIP and private placement. A compelling story was needed for QIP. This is where the six-way demerger plans came in handy. That was enough to raise $1 billion to plug the millions of holes in the promoter entity, Vedanta Resources.

The stock is now more than double its lows hit on October 23. It would be naive to think that this group’s problems are behind it, especially when its balance sheet has a leverage of almost 3 times and also in a business that is exposed to a highly cyclical raw materials sector. But for now, institutional investors are happy to snap up the shares at a hefty premium, hoping to get the best of the spinoff game before the music ends.

Another group caught in the quagmire of bad governance and high debt, Zee, could be smelling a hot opportunity in the QIP game to resurrect its fallen empire. Not surprisingly, Zee Media, in its stock exchange filing last week, announced its plans to call a board meeting to consider fundraising, among other things. Similarly, the struggling airline SpiceJet is getting a second life after successfully raising funds through a QIP this month. It is not the first time that this company has been rescued from the brink of bankruptcy.

With a history of flirting dangerously close to the edge more times than one can count, it’s unclear if this latest resurgence will be the last. Interestingly, markets have been unusually generous and forgiving. But then, what else can you expect when the music is still playing, and it has been for so long?

You can go on and on. The common thread of all these stories is that promoters and companies manage to recover by taking advantage of the favorable liquidity environment. However, in the long term minority shareholders They often bear the brunt, facing significant dilution as a result of these liquidity-driven revival episodes.

It is no coincidence that funds raised through QIP in the first eight months of the calendar year (Rs 58,000 Cr) have already surpassed the total raised for the entire last year (Rs 52,000 Cr) and are on track to hit a record 10 billion dollars by the end of the year. For “Rise of Phoenixes,” the show has just begun and there may be endless episodes in play. Viewers will need a lot of patience, and perhaps a lot of free time, to watch this never-ending saga unfold, while hoping the music doesn’t stop!

(The author is ArunaGiri N., Founder CEO and Fund Manager, TrustLine Holdings Pvt Ltd. Views are his own)