India’s ECM momentum looks set to resume after a slow start to the year thanks to a combination of robust economic growth, structural reforms and government sell-downs.
Indian equities have had a rough start to the year in line with other global stock markets, fraying investor nerves after an upbeat 2015, but fundamentals still point to another strong performance over the next few months.
India’s ECM clocked its highest deal volume since 2010 last year, at US$20bn, and early estimates indicate that transactions totalling US$15bn–$20bn may get done this year, thanks to continued economic reforms and consumer-led growth.
“The volatility in January has unnerved the thought process but has not dampened the long term outlook,” Atul Mehra, managing director and co-CEO at JM Financial.
Mehra says sectors tied to domestic consumption – services, consumer goods, healthcare, auto components and some infrastructure segments – will continue to do well.
“India is still one of the rare growing emerging economies. That should work to its advantage,” a local ECM banker said.
Still, external factors will be calling the shots in the short term, foremost among them Chinese economic growth and US monetary policy.
Although the US Federal Reserve is not expected to raise rates in a hurry, the threat of outflows from emerging markets including India is weighing on sentiment.
Similarly, market participants are unable to fully gauge future Chinese economic policy and its likely impact over the rest of Asia.
A Mumbai-based fund manager said the weakness in the secondary markets will put pressure on local mutual funds, the main market movers in 2015. Data from the Securities and Exchange Board of India shows that equity mutual funds recorded inflows of Rs670bn (US$9.8bn) from April to December last year.
Meanwhile, according to data from the National Securities Depository, foreign institutional investors sold shares for a net Rs145bn in the first six weeks of 2016 compared with net purchases of Rs178bn for the whole of 2015.
“Even if there are no serious redemptions, at least the new mutual fund launches will be fewer. In fact we are struggling to come up with new theme-based funds,” said the fund manager.
Most of the buying for IPOs and share sales in 2015 came from local mutual funds and institutions and this could slow down unless they are able to raise sufficient funds from investors.
For this reason, the fund manager anticipates that ECM volume will be lower than the US$15bn–$20bn estimate.
Decent IPO pipeline
Despite the recent market sell-off, the economic outlook remains robust. “With the revival in infrastructure creation activities, removal of supply-side bottlenecks and decline in interest rates, the urban demand could pick up and the rural economy could get a boost, pushing the corporate earnings higher in the next two to five quarters,” HDFC Bank said in a research report.
“FII flows are expected to come back in India in 2016 due to strong macro economic factors, upbeat multilateral agencies that expect India GDP to outperform and the government’s focus on reform announcement to drive the economic growth higher,” HDFC said.
The IPO pipeline looks decent, although many issuers have not confirmed launch dates yet. Mehra said the primary market activity will be led by private equity divestment in companies.
L&T Infotech is expected to launch a US$300m float in March. The other large IPO to watch out for in the first half of the year is PNB Housing Finance, which is planning a US$385m IPO in April.
Equitas Holdings’ US$200m, Infibeam’s US$71m, GVR Infra Projects’ US$80m, Matrimony.com’s US$100m and Parag Dairy’s US$135m are the other likely floats in the first half.
In the second half, likely applicants include International Tractors (US$200m), Mahanagar Gas (US$150m), Hinduja Leyland Finance (US$100m), Thyrocare (US$82m), Quess (US$60m), Paranjape Schemes (US$95m), VLCC Healthcare (US$91m) and Cooper India (US$60m).
The Indian government is also returning to the IPO market following National Building’s Rs1.3bn listing in 2012.
The Department of Disinvestment recently invited bids from banks to manage the Cochin Shipyard IPO which is estimated at Rs12bn. State-owned Pawan Hans has hired SBI Capital to advise it on a prospective IPO. However, both these floats are not likely to happen immediately if the government’s past record is any indication.
Although the average size of the IPOs is expected to remain in the US$80m–$150m range, bankers are hopeful that some of the private insurance companies will at least start work on their mega listings. HDFC Life is currently in the process of hiring banks and SBI Life is expected to follow suit. Bankers said both IPOs will exceed US$1bn.
Vodafone is also expected to list its Indian business through a US$2bn local IPO, with preliminary work due to start this year.
Although lower oil prices have relieved the pressure on the fiscal deficit, privatisations are still on the cards.
The government plans to sell a 5% stake in Container Corporation for a maximum Rs12bn in March. Shares are also likely to be sold in Bharat Electronics, Coal India and NTPC during the rest of the calendar year.
Privatisation proceeds have fallen well below target in the fiscal year ending on March 31. So far Rs133bn were raised from the sale of shares in state-owned companies against a target of Rs410bn.
Several companies are thought to be planning qualified institutional placements, but visibility remains poor. “There are enough good names available at attractive discounts in the market. Managements are in no position to drive prices. This market will have meaningful activity only in the second half,” the ECM banker said.
IDBI Bank, Union Bank, Yes Bank, Cadila, Jubilant Lifesciences, Pipavav Defence and PC Jeweller are among the companies that are planning QIPs.
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