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Fund raising this year is likely to be better than the past couple of years with investors continuing to remain constructive on the Indian market, says Sanjeev Jha, director and head of India global capital markets at DSP Merrill Lynch. Delay in earnings pick-up might not bother investors much and deal momentum will get stronger during the second half of the year, Jha tells Samie Modak. Excerpts:
Do you expect the primary momentum to get stronger?
Initial public offerings (IPOs) are a 10-month long process. Companies, which started working on IPOs after the election results last year, are currently in the process of filing their offer documents. These deals will start coming to the market during the second half of the calendar year. Qualified institutional placements (QIPs) and offer for sale (OFS) will continue to remain the major sources of capital raising. Given the disinvestment targets for the year, government deals will be one big source of volume. So if you look at the headline numbers, just on equity alone, India will raise close to $25-$30 billion in 2015. That compares favourably with what we’ve raised over the past couple of years.
There aren’t too many signs of improvement in the economy on the ground. Is that a worry?
You have to look where we are headed directionally. So it won’t matter too much if earnings start reviving in the next quarter or it takes two quarters. Investors are not coming here with a six-month view. We are in a five-year cyclical bull run. So from that perspective, I don’t think people will be worried about a quarter. There will be some consolidation in the market, like we are having right now. But the long- and medium-term view remains very constructive, which is why you are seeing so many IPOs, block deals and QIPs happening.
Has deal making become more challenging given the sharp rally we have seen over the past 20 months?
The market is increasingly differentiating between good companies and management that they want to back. Investors want to see clear use of proceeds. They want to see fund-raising translate into earnings over the next two years. This is not a market where if you have two good IPOs, the third will also be a success. So, in a way, it is going away from herd mentality. That is the biggest difference that we are seeing now compared to 2009. I won’t say deal-making has become challenging. But every deal will have different set of investors who would like to buy it. So it’s not the same 10 guys you go to for every deal and they keep buying. You have to find pockets of interest for a particular deal.
Do you see good demand for some of the impending government disinvestments?
We have to go by precedence. We did the Coal India OFS, which was the largest deal out of India. The issue was fully subscribed. FIIs bought close to $1 billion in the deal. The REC (Rural Electrification Corporation) issue after that did well. So there is enough appetite for PSU (public sector unit) offerings. People find value there. So they will continue to be successful as and when they come to the market.
Do you expect Indian companies to list overseas?
India continues to be a very vibrant market and any company can raise capital here. But overseas fund-raising is definitely an option, especially for sectors such as e-commerce that are better understood by investors in the US, which offers the largest pool of capital. So you will see more and more companies going down that route. Companies will list aboard with an objective such as investor diversification or valuation arbitrage.
Has the retrospective tax issue on overseas investors hurt investor sentiment?
It is a topic of discussion. But when you speak to an overseas investor even today, the main focus is how earnings or capex cycle will play out and what the near-term story looks like. We don’t have a clarity on what exactly is going to happen on the tax issue. So it has got blown out of proportion. But I don’t think that’s the main focus for investors. The main focus will be how they see the fundamental story playing out.
Which are the exciting new sectors in terms of IPOs?
Insurance along with e-commerce will be the two main sectors for capital raising, especially in the IPO space. Healthcare will be the third big sector where you will see continued interest from investors. The insurance sector has just been opened up. We’re waiting for some more regulations. As and when things get crystallised, we’ll see some action there.
