We need to be mindful of responsible pricing: Kotak Investment Banking CEO

One takeaway from last year is that most IPOs returned money to the investors, S Ramesh, Managing Director and CEO, Kotak Investment Banking, said

The year 2023 was robust for equity capital market (ECM) activity and the momentum will sustain this year, believes S Ramesh, managing director (MD) and chief executive officer (CEO), Kotak Investment Banking. In an interview with Sundar Sethuraman in Mumbai, Ramesh says there could be a small lull in private market activity ahead of elections. He also stressed the need for responsible pricing so that investors make money and are enthused to return to the market. Edited excerpts:

We have had a blockbuster year as far as ECM activity is concerned. What have been the key takeaways? How will 2024 pan out? Can we top 2023's ECM fundraising tally?

One takeaway from last year is that most initial public offerings (IPOs) returned money to investors. Second, we saw the advent of local investors, whether it is mutual funds, insurance companies, family offices or retail. As investment bankers, we need to be mindful of responsible pricing so that investors make money and are enthused to return to the market. I expect the ECM activity to be robust over the next 12-18 months. And, the size of deals is much larger. I don't see any challenges as such. There is a lot of volume in IPOs, which will happen. We are enthused by the flows that are going to come from both local and global investors. I expect the sell-down (block deals) activity of 2023 to sustain or grow in momentum, making markets more liquid.

Primary market activity slows down in the months before elections. Will it be different this time? What are the other headwinds and tailwinds?

Primary markets are like marriage seasons, a bit of on and off.

Elections in India and the US could be a short window when issuers may feel this is not the time to hit the market. The broader feel among corporates and investors is this is a structurally positive market. Therefore, even if those short windows are shut, the IPO momentum is unlikely to stop. Generally, market participants follow a principle: when there is an event, we prefer not to keep an IPO open. It's more from a safety factor than anything else. That may be the case this year. It may be a shorter window than in the past.

The average IPO size has been declining over the years. Why is it happening? Will it continue?

Last year, the industrial, manufacturing, and smaller digital and services sectors went public, so their sizes and averages dropped. It's nothing more than that. We expect the average IPO size to go back to Rs 1,500 crore this year.

Given the sharp rise in equity markets, is there a concern about valuations affecting ECM activity?

Indian markets are generally elevated. And, it's due to high growth. India is among the largest countries in the world to show economic growth, which is sustainable and compounding. It is a high-entry, high-returns market. Secondly, we have seen responsible pricing in the last 12-18 months. Investors are making money, and I would like this phenomenon to continue where issuers are getting the pricing while investors find it attractive.

Can you elaborate on reasonable pricing? Is there any attitude change?

It's more than an attitude change. It's a buyer's market. Indian institutional investors are far more discerning about measuring risks, which has brought a different philosophy to pricing. There is a very extensive evaluation of the institutional investors. And, even if they take part in slightly higher priced issues, it's because they are convinced that the growth will be here for several years.

How much does FPI support matter in deals these days?

It matters, especially for the sell-down activity. One trend we saw at the end of 2022 and during 2023 was a polarised view of the primary markets. We saw a bunch of investors, particularly domestic investors, who are ready to bet on new themes. And, the FPIs wanted to deepen their investments in companies with existing track records. If you see the more extensive sell downs, there is reasonable participation from domestic players and FPIs.

Some new-age companies have filed their documents. Will this time be different for them, or will it be hype followed by disappointment?

Listing of new-age companies is a new phenomenon in India. There was a learning curve for capital markets from the first batch of these companies, which got listed. This time, there is a greater focus on a path to profitability. The elevated pricing we saw because of the secondary market ebullience is unlikely to repeat. There is more focus on near-term growth and profitability.

Which themes will dominate the IPO pipeline this year?

A diversified bunch of companies will hit the markets this year, and I expect some new-age tech listings to happen. We will also see larger financial and tech services, manufacturers and infra companies go public.

We saw Grasim announcing a rights issue this year. Will more follow suit?

I don't expect a lot of rights issues. But I do expect relevant companies from larger groups to do rights issues. Some of them have either done acquisitions or undertaken projects.

How have regulatory changes like T+3 benefited the IPO market?

T+3 is an example of how we make our markets efficient. We were 30 days ago. Then we went to 15 and 7. It has helped in faster settlement, and the funds are getting rotated faster. And, market risks have come down. We can capture contemporary market conditions. And, the infrastructure has improved.

How was 2023 for Kotak Investment Banking?

The year 2023 was an excellent year. We did both sell-downs and M&A; we had the fortune to be involved in marquee deals.

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