FPIs' participation in IPOs has reduced as MFs have got bigger: Khaitan

Deal-making this year has become more challenging with increasing market volatility. Sunil Khaitan, India head, global capital markets, Bank of America Merrill Lynch, shares his view on the outlook and trends on the primary market with Samie Modak. Edited excerpts:

The primary market this year has been good but not as good as last year. What’s the reason? 

For the last two years, the Vix index, a global measure of market volatility, was at an all-time low, something that is never seen for such a prolonged period. Now, with the US Fed raising rates, the Vix has been rising. We are seeing a market where generating returns is not as easy as it used to be over the last three years. Global markets have been rocked by trade war fears. The story is, however, a bit different on the deals side. From a primary market perspective, markets need not necessarily be buoyant for deals to perform well. Transactions from high-quality issuers get done no matter what. However, what doesn’t help is uncertainty or extreme volatility. That’s the environment we have lived through this year, making deal closures challenging. Therefore, the deals' performance has been a mixed bag. You have HDFC AMC, which had a stellar listing while some other deals didn’t do too well—a scenario also seen across the Asia-Pacific region.

Most recent IPOs haven’t made money for investors. Do you think the pricing could have been better?

A good deal is where there is some money left on the table for investors. Globally, investors typically expect an IPO to come at a discount of around 10 per cent to its fair value. That is the reward investors expect to receive for taking the investment risk. From a company’s perspective, an IPO is the start of its relationship with the capital markets and hence, it should start on a positive note. It helps the company tap the market for growth capital it may require in the future.

Overseas investor participation in the primary market has declined. Why?

On the primary side, typically, it is a deal-specific discussion. So, if it is HDFC AMC, it is a straightforward discussion to have. There was a situation two years ago when everything was finding investor interest, something that is no more prevalent. Investors want valuation discussions to happen; foreign portfolio investors (FPIs) want pricing to be more sensible with some money left on the table. India continues to draw a broad-based FPI interest in the primary market. Still, the percentage of a primary market deals sold to FPIs, on an average, has definitely reduced—due to domestic mutual funds (MFs) becoming bigger in size.

Are rupee volatility and elections key talking points for investors?

An unstable rupee impacts sentiment, which eventually plays into broader discussions around oil prices and global central bank policy decisions. Investors question whether the RBI will continue to hike rates to prevent the rupee slide at a time when the Fed has indicated it would continue to raise rates. Election also is a crucial talking point. Still, the broader consensus is that India will continue to do well both on macroeconomic terms as well as financial market returns. Irrespective of who comes to power—investors prefer political stability and policy consistency. Therefore, over the next to six-eight months, there would be a lot of chatter – to begin with, the various state elections later this year, then about the timing of the general elections in 2019 and then the actual elections.

How much equity paper supply can we see in the remainder of the year and which sectors will dominate?

In terms of supply, between now and end-December, issuances worth $5 billion are lined up. From the sectoral perspective, financial services would continue to remain the largest issuer while real estate would see a few big deals. Beyond these two sectors, deals get diverse and we will see companies from renewable energy, healthcare and consumer sectors tapping the market.

After HDFC Bank’s success in overseas equity fundraising, will the American depository receipt (ADR) market open for more companies?

The last ADR deal to happen from India was again by HDFC Bank in 2015. We think, for Indian companies to actively look at ADRs as a fundraising option, a few regulatory changes need to happen. There is a broader pool of capital available in the US and also, that investor base has the ability to value companies, which would not be profitable in the near term. Also, a majority of other countries allow companies to directly list on the US bourses, something which Indian companies cannot at this point in time. There is a committee of experts looking into this—a welcome move. Hopefully, this would be eased soon. Until then, ADR issuances from India would remain selective.