'Home-grown PE businesses will do well'

Q&A: Tarun Kataria, MD and Head of Global Banking and Markets, HSBC

India Inc can take advantage of the PE (price to earnings) multiple arbitrage as global multiples are not as high as the India’s, says Tarun Kataria, managing director and head of global banking and markets, HSBC. HSBC has been associated with some large equity issuances recently, including Oil India’s public issue and Hindalco’s qualified institutional placement. In an interview with Vandana, Kataria says that with financing no more an issue for corporate India, the stage is set for the next round of cross-border activity. Excerpts: 

How has the crisis impacted the type of deal flow that we are seeing?
The impact was felt across the board, be it financing or mergers and acquisitions (M&As). That was till 12 months to the summer of 2009. Now, with improvement in the situation, deal flow will happen in two stages. In the first stage, which is well underway, equity capital markets (ECMs), where deleveraging is the key mantra, will benefit. Clients are cleaning up their balance sheets by raising equity, essentially to be positioned for the next stage of deal flow. That will happen in the M&A space. At the same time, global and Indian liquidity conditions remain supportive. This would suggest an extended period of ECM activity. The second stage of deal flow, still in infancy, will take place in cross-border M&As. With rebuilt balance sheets, PE multiple arbitrage where global multiples are not as high as Indian multiples and financing is more readily available for India Inc, the stage is set for the next round of cross-border activity. So, if a corporate client seeks to raise $1 billion in equity or through the external commercial borrowing market to buy a $2-billion offshore company, it is achievable once again. We are seeing this in our pipeline of ECM and M&A activities which is as robust as it’s ever been. 

A lot of power and real estate IPOs are lined up. How do you see them? Has investor appetite for real estate returned?
The two sectors that concern me are power and real estate, for a couple of reasons. One, just the absolute size of public offers that have been filed for, and two, the quality of some of these. In both these sectors, valuation and execution are the key. So, while the appetite may be there, it's critical for the longevity of the financing market that investors analyse the ability of the issuer to build power plants it promises or develop real estate according to the plan. I remain to be convinced that every issuer will be able to deliver.

What is the sense you are getting from institutional investors regarding the India story? Are public sector undertakings (PSUs) of interest? Any sector of particular interest?
We are often on road with Indian companies visiting institutional investors at major financial centres. Foreign institutional investors (FIIs) remain bullish on India to a point where we don't have to sell the Indian story any more. They understand the compelling demographics, the quality of governance and transparency, high savings rate, entrepreneurial zeal and the best-in-class management quality. So, you have strong fundamentals, backed by the emerging markets cache coupled with global liquidity, which makes for a heady mix. Frankly, I can't think of a more compelling investment destination. PSUs are interesting for a couple of reasons. They present growth opportunity while providing the upside of transition from government to public ownership and tend to offer large liquid trading opportunities. They are also in interesting sectors such as oil & gas, mining & metals, and infrastructure.

Other sectors of interest are the “emerging India” sectors such as fast moving consumer good, banks and insurance.

How are things unfolding on the private equity side?
Private equity is an interesting business, which I'm not convinced any of us has got right yet. The ideal time to have invested was some months ago when valuations were more sensible and alternative sources of capital were not available. Yet none of us used this window. At today’s valuations, it takes some doing to convince an investment committee sitting in London or New York that an investment makes sense. And here's why. India Inc trades at 17x forward earnings. A peer group company in the investment committee’s home market probably trades at a discount to that. It can be a tough leap to make. Which is why I believe home-grown PE businesses can and will do well. 

So, will $24 billion of private equity money sitting on the sidelines ever get put to work? Probably not in a hurry.

There is this talk about 25 per cent public shareholding. Sebi is also talking about cutting the IPO timeline. How do you see these developments?
Increasing public float is never a bad idea. One, it's good for liquidity and trading volumes, and two, it provides much better price discovery than an issuer with a minimal float. I would view what Sebi is doing as positive for equity markets. The same should apply to the PSU divestment process. This, of course, has the added benefit of replenishing the Centre's coffers, which is not a bad thing. When it comes to reducing the timeline for public issues, anything that brings transactions to markets quicker is welcome. This would apply equally to the filing and response time and the allocation of stock to investors.