About two months back, Goldman Sachs expected India Inc to raise $13 billion through sale of shares in the current financial year. Since then, over $7 billion has been raised through qualified institutional placements (QIPs) and some large initial public offers (IPOs). However, concerns over inflation and monsoon are building. Anshul Krishan, head of India financing group at Goldman Sachs, tells ABHINEET KUMAR that equity issues are going to continue and companies are most likely to achieve the target. Edited excerpts
Inflationary pressures are building up. Prices of oil and other commodities are surging. How are these going to impact the profitability of companies and in turn the performance of stock markets?
This has become a topical question. Bear in mind that the price of oil, for example, has been hovering over $60 for a while now. The capital markets’ reaction does not suggest that this issue in itself is being given primary weightage when it comes to the expected impact on the bottom line of companies. As long as the surge in commodity prices is seen to be fairly reflecting the expected pick-up in demand through an uptick in overall economic activity, it is the latter point that is getting greater market attention.
Do you see any severe impact of monsoon on stock markets and in turn on fund-raising plans of companies?
I think there is a significant level of data around this year’s monsoon that is now known broadly. There is definitely a higher degree of gravity that people have had to come to grips with over the past few weeks. And as you would recall, there were days on which this was reflected by India underperforming the region. But in terms of overall economic direction, the market seems to be taking this aspect in stride. In a wider context, once again, what appears to be really driving the capital markets is an overarching macro view about the relative outperformance of economies such as India’s and Asia’s and the trickle of evidence that the global economic malaise might have bottomed out.
To evaluate with a glass half-empty view, yes there is risk from factors such as commodity prices and inflation, from events such as an unusually weak monsoon, etc. Once any such data point starts overwhelming the broader aspects of demand and expectations of macro stability, the risk-reward trade-off starts looking quite different. Right now, most market participants are quite willing to give the benefit of doubt to the right-side risk.
IPOs are getting aggressively priced. The Adani Power IPO has not benefited investors in terms of listing gains. Will this dampen investor enthusiasm, especially in the retail segment?
It is premature to draw conclusions on the Adani IPO and its impact on investor enthusiasm. That aspect of the primary market is yet to play out fully. We have had only two-three notable IPO candidates go live in this latest phase of activity. Even during much stronger market conditions, much lower over-subscription levels in the retail tranche were not unusual. Institutional activity, therefore, continues to be the primary driver. Will flat to weak after-market performance of one or two high-profile IPOs make it harder to get more retail or HNI (high networth individual) interest? Probably yes, but that doesn’t necessarily mean that a wave of IPOs cannot not get executed successfully.
Yes, pricing considerations will adjust and thresholds of acceptability may tighten but the fact is that there is fundamental appetite for new and credible stories. I personally believe that the IPO market should be quite active over the near term.
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Which sectors do you expect to drive the IPO market?
The power sector is clearly a highly-emphasised aspect of the Indian economic equation. It doesn’t take much to observe that the power sector story in the economy and in the capital markets is bound to continue to develop. The other sector where companies are in the wings to access the IPO market is real estate. In the same way that listed real estate companies dominated QIP issuance, the several private real estate companies that were shut out from the public market since early 2008 are now expected to revisit this option. These two sectors are therefore fairly identifiable.
In to the medium term, there are expectations that business sectors such as insurance could also see some companies try to assume a public life. There are also several attractive private candidates in telecom and related infrastructure segment. Some would be driven by regulatory factors and others by the time taken to evolve into IPO-ready candidates.
Fortis recently announced acquisition of Wockhardt hospitals. Do we expect more merger and acquisition (M&A) deals due to excess leveraging by companies?
By most measures, the access to capital that an average company in India has today is better than it was nine to 12 months ago. Now, if the same company that was highly levered then has been able to navigate the environment, owing to a combination of factors — from successfully renegotiating bank covenants or maturities to sale of non-core assets — its ability today to capitalise its balance sheet and improve leverage should in theory be a lot less challenging. But yes, investors are discerning today and there are bound to be examples of companies not able to raise equity efficiently. Strategic options would therefore remain a part of the toolkit. That said, when you are talking generally about sell-side M&A being driven by virtue of being a last resort option, I expect those situations to arise but certainly not become the norm.