Global investment bank power houses are pinning hope on attractive financing markets for the revival of outbound acquisition by Indian companies this year. The banks such as Morgan Stanley, Barclays and JP Morgan have had a tough year as the investment banking fees for the industry declined by about 46% to $282 million in 2012, as per the estimates of Dealogic for the year till 7 December. Dealogic is London headquartered firm providing consultancy services to global investment bank.
For the revival of capital markets business, the banks are hopeful that government divestment plan will provide the much needed push in 2013. Last year saw a 77% decline in the volume for initial public offers (IPOs) at $314 million till 7 December. However, a $830 million IPO from Bharti Infratel at fag end of the year proved to be a saving grace for the year.
V K Bansal, chairman, Morgan Stanley India says, “The view that we have is probably in the April to June quarter you would start seeing good quality IPOs entering the market.” “Besides January to March quarter will see large follow on offerings and government divestment,” he adds.
He is pinning hope on government’s need to bring down the fiscal deficit before the annual budget. The banks are also hoping that sentiments will improve post the budget facilitating platform for high value IPO’s from companies such as Vodafone India who have been waiting for policy clarity.
But the silver lining in the capital markets story in 2012 has been the growing demand for debt capital. In 2012 Indian issuers tapped the US dollar denominated market for a total of $8.1 billion up from the annual record of $8 billion achieved in 2011. This was primarily at the back of Reliance Holdings' $995m bond in February and State Bank of India's $1.2bn bond in July. Total volume for debt capital climbed to $40.5 bn in 2012, up 3% year-on-year.
"We do expect more and more issuers to tap debt capital markets, both onshore and offshore in 2013,” said Jaideep Khanna, managing director and head of corporate and investment banking at Barclays India who have been involved with leading debt transactions this year. With Basel III norms increasing banks’ capital requirements, good quality borrowers will be able to raise funding more efficiently by tapping bond markets. However, corporate issuers are waiting for some more clarity around reduction of withholding tax applicable to bond issues.
“While we expect increased cross border issuance activity, in domestic markets too, we’re seeing increased demand from investors for high yield paper,” he says.
But the biggest challenge that the banks are facing is on M&A front. In 2012 for the period till 7 December, there was a 65% volume drop in inbound acquisitions to $10.5 billion. The total volume for the M&A transactions in 2012 was a 2% down to $43.3 billion as the out bound deals picked up by 34% to $14.5 billion in the year. This was primarily boosted by Oil & Natural Gas Corp (ONGC)'s $5bn bid for assets in Kazakhstan.
“Macro environment globally is still uncertain and companies with strong capital structure will definitely do better and be able to withstand volatility,” said Aisha De Sequeira, managing director, Morgan Stanley. Besides, financing markets globally is very attractive with low interest rates and that is beneficial for Indian companies who prefer leveraged buyouts by putting debt on target companies, she further explained.
Sectors largely insulated from government policies such as financial services, technology, health care would see more M&A activity in 2013 vis a vis the sectors such as telecom which is prone to policy infirmity. Minerals and resources space will continue to see outbound interest for M&A in countries such as Africa and South East Asia.
“We don’t expect that the balance sheet of Indian firms will turn around in a hurry," said Rohit Chatterji, head investment banking at J P Morgan India. "But deal environment will be better in 2012 as financing will be reasonably strong," he said.