There is strong investor interest for the right issuers: Asit Bhatia

Bank of America Merrill Lynch's Bhatia says he hopes to build on Q1's strong momentum

Fund raising activity, both in equities and debt, has been pretty robust in recent times. In an interview, ASIT BHATIA, managing director, India Global Corporate & Investment Banking Group, Bank of America Merrill Lynch, tells Vishal Chhabria that the first quarter was good and he is optimistic about 2017, while sharing his views on the other trends in the market.

How has 2017 been so far from the deals perspective? Any targets or plans in mind for the year?

It’s been a busy period, for both capital markets and mergers and acquisition (M&A) activity. No complaints for sure in the first quarter. We have another three quarters to go and we remain optimistic with a solid pipeline. We hope to build on the strong momentum that we have seen in the first quarter.

When you talk to companies, what is the impression you get in terms of the offerings they are looking at, the amount they plan to raise, etc?

On the debt capital markets side, companies are now increasingly looking at accessing the offshore bond market, for two reasons: Interest rates continue to be fairly attractive and credit spreads are at historical lows, as there is a tremendous amount of liquidity that is chasing good paper. Interestingly, we are also seeing newer structured product offerings, which are also getting lapped up by investors.

Similarly, on the equity side, in the March quarter alone, we led two qualified institutional placements (QIPs), which were fairly large deals by Indian standards. The response was good and the issuances happened almost flat to market price. This shows that there is strong investor interest for the right issuers.

Any new instruments Indian companies are using to raise funds, and how is it different this time around? Are India’s strong macros helping?

Yes. Let’s accept that the Indian macro is in a good position today. But, ultimately, investors do look at individual issuers. And therefore, good issuers, who have kept investors updated on what is happening in their company and the industry, who have a good story going forward and who have good corporate governance standards, their paper sells. Investors want to back the right companies. Anything and everything won’t sell just because there is high liquidity in the system.

Volatility in the markets is another important factor for consideration. Therefore, one has to time the issuances to perfection. There have been several external events over the past few months such as say the US elections, the geopolitical situations around the world, the French election, Brexit, etc, making markets volatile. Consequently, the time window for execution of deals has become much tighter.

With markets at all-time highs, do you think valuation is playing a hurdle for equity issuances?

Markets have been on the run for over the last several months and, every now and then, people have said that valuations looked rich. Despite this, I would say that India is still on a good wicket.  

In the past 12 months, we’ve seen many initial public offerings (IPOs) from new sectors — diagnostics, life insurance, among others. Any more new segments emerging in the IPO space?

Newer sectors will continue to access markets in the future, e-commerce is an example. We haven’t really seen issuances in this area. There is obviously some consolidation happening in the e-commerce industry, but still, we will find issuances happening in the future. The real estate investment trusts and infrastructure investment trusts (InvITs) are being filed now and, over the next few months, we will see some successful issuances in those sectors too.

Bank of America Merrill Lynch has been at the forefront of bringing new sectors to the market. To name a few: The first private sector bank, airline company, telecom company, telecom towers company, the first insurance company etc. That has always been the forte of our franchise.  

The government has also lined up many offers through divestment and IPOs. Can markets absorb all of this huge supply?

There is enough liquidity right now for the markets to absorb the supply. For good quality paper, there is liquidity for sure. In fact, the issue sizes are getting larger. The insurance IPO that we did last year was about Rs 6,000 crore, the largest in the past six years, and it was oversubscribed.

A broader trend is that the money being raised is more for refinancing the debt or an exit by private equity investors, but not much for companies to invest in the business. Does that worry you?

There has definitely been a pause in terms of new capital investments in the country. But, we have got to accept that a tremendous amount of capital investment happened over the past several years. While some of it is M&A led, others were from creating new capacities. Therefore, until these capacities are fully utilised, corporates are not going to put more money for new capital expenditure. On the debt side, what we are seeing today is refinancing to lower the cost of borrowing and extend maturities, given the strong liquidity in the market.

Barring a few sectors or deals, not much has happened on the M&A front. In sectors like roads, power, steel, even as valuations have fairly come down, activity levels are still weak. What’s your take?

The roads sector will go through a complete change once InvITs are well accepted in the market. Some of the M&As in cement or power sectors are about distressed assets going to stronger players.

On the cross border front, I see interest both ways. India Inc is now looking outside because the domestic situation is more comfortable than it was a few years ago. The industrials sector is one such example. On the in-bound front, we have seen deals in the infrastructure, e-commerce and insurance areas. This is a clear indication of the “interest” being both ways, something very different from say 2 to 3 years ago.

When I see our own M&As pipeline, it does give me confidence around the deal flow. We have closed three deals in the first quarter and we are hoping for the run to continue.