Micro, macro and geopolitical factors favouring Indian markets: Ajay Saraf

Markets activity will be robust but be careful around large events, says the head of Investment Banking and Institutional Equity at ICICI Securities

The domestic equity capital market (ECM) is witnessing one of its best phases, with record block deals and maiden share sales. AJAY SARAF, head of Investment Banking and Institutional Equity at ICICI Securities, says this is driven by tailwinds such as favourable macro, strong liquidity and encouraging earnings growth. Saraf, in an interview with Samie Modak in Mumbai, said the deal momentum will continue and there could be a brief pause ahead of the general elections next year. Edited excerpts from the interview.

The pipeline for both initial public offerings (IPOs) and block sales looks strong. What is underpinning this deal momentum?

For India and our markets, the stars seem to have aligned quite well. There are micro, macro and geopolitical factors that are favouring India. You are also seeing companies post robust earnings growth. And this is likely to continue. Our house view is that the earnings growth for the Nifty 50 companies will be 17 per cent annualised for the next two financial years. Since April, we have also had robust participation from foreign portfolio investors (FPIs), which was not the case in the preceding 18 months. This has turned the sentiment in favour of doing transactions. Blocks are generally the first to find favour, given the stocks are already listed and have a trading history. A lot of private equity-backed companies, which went for IPOs in 2021, are seeing blocks as some investors are now looking to exit. So, the supply is there but it is also being met with good demand, which is resulting in pretty robust activity.

Last month we saw a record number of block deals. Also, the supply got absorbed well and even the stock prices reacted positively. Why so?

Whenever there has been a cleanout trade (an investor exiting completely), you see stock prices react positively. Where there is no supply overhang stock that’s when you see the markets react positively as was the case with some of the recent transactions.

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Most new listings this year have made money. What would you attribute this trend to?

IPO pricing has become more moderate compared to 2021. As pricing is more rational and reasonable, investors are making money post-listing. Also, most IPOs that are happening are at a significant discount to their listed peers. That is also supporting the post-issue performance.

We have seen companies re-filing with smaller issue sizes. Why is that happening?

What the market is demanding today is a margin of safety. So there is a good discount to the comparable peers. The issuers are saying if the market is asking for a discount, I will do a smaller issuance. They are saying let me list first and based on my performance over the next 12 months, I will get a full value. After that they can do a subsequent follow-on issuance at a better price. That’s the thought process today.

What’s the outlook for the next one year?

Next 12 months activity will be robust. But the market will be careful around large events. One such event will be the next year’s general elections. Typically, before an election there is volatility in the market which isn’t too conducive for deal making. But from now to December, the outlook appears robust. Also, there is a lot of pent-up demand as the activity was weak during the start of this calendar year. What is encouraging is that there is good demand from all segments of investors be it institutional, retail and high net worth individuals (HNI). All are active in this market.

Do you expect any particular sector or theme to dominate going ahead?

We expect broad-based activity. Currently, manufacturing is the flavour of the season. Financials have always been active. Going ahead, we will see participation from large tech and new-age companies as well. Over the past six months, the stock performance of new-age companies has been good. Also, large blocks in these companies are finding favour with both domestic as well as foreign investors. This is giving confidence to companies sitting on the fence to come to the market.

What is your view on the proposed new delisting framework?

The new delisting norms could get implemented over the next 3-4 months. We expect that to spur delisting.

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There are concerns that the new norms squeeze minority shareholders’ interest

The proposed changes are safeguarding the interest of minority shareholders fully. The threshold of 90 per cent is not changing. So a vast majority of shareholders have to agree on the price. I don’t believe that the revised proposals in any way compromise minority interest.

What is your view on the overall regulatory changes that have happened?

India is one of the best-in-class in terms of our settlement cycle and now IPOs [are] getting listed at T+3. All the changes are for the better and are being appreciated by everyone. There is some more work that companies have to do but there is no discomfort. People need some time to get used to the new regulations but they are adjusting. There are a lot of benefits of these regulations.

Is there a lot of demand from companies to list overseas?

Our market capital is deepening every year. Large transactions are getting executed easily in India. A company by listing overseas won’t get the same kind of attention that it would get by listing in India. Valuation-wise also companies can get better multiples here. Therefore, I don’t see why any company would want to list overseas. Of course, there can be a few use cases but that would be rare.

How has been the year for ICICI Securities?

We have done well I would think and we have a good pipeline. Over the next 12 months, we have been mandated for transactions which are much bigger in size then what we have done in the past 12-18 months. As a result, the next 12 months look promising. We are also focusing on advisory transactions both on the M&A and private equity raise side. That is the practice we are growing rapidly and we are investing in that. We want to grow that practice to be equal to our ECM practice.