Demand for Indian equities still robust

ICICI Securities head of investment banking, J Niranjan, talks about why neither high Indian equity capital markets valuations nor competition is keeping him awake at nights.
India¦s Sensex peaked at 11,931 on April 7 before moving south, losing almost 6% in the week beginning April 10 and closing at 11,539 on Monday, April 16. There is a feeling in the region that issuers are pricing paper too aggressively, especially as a correction seems due. J Niranjan, head of investment banking at ICICI Securities, explains why he disagrees.

Recent new issues have been difficult to sell, leading to concerns that competition for mandates could be pushing investment banks to commit to pricing which may not be achievable. What is your view?

We continue to see a robust demand from investors for initial public offerings (IPOs) and depositary receipts (DRs). We have seen more than 57 issuances since January, compared to 107 issuances for calendar 2005, with most equity issuances quoting above offer price. Investment banks always keep in mind the viewpoint of large institutional clients û who take a substantial portion of the book nowadays û while determining pricing. Further, companies have the maturity to understand that they will be repeat issuers hence need to price at a level which is sustainable and leave something on the table. The major perception regarding aggressive pricing has been in the convertibles market. Some convertibles could have been "mispriced" but given the nature of the product convertibles are always tricky to price.

Why has the market price of some new issues û for example, Gitanjali Gems, JK Cements, Andhra Bank û gone below issue price on day one?

All these offerings witnessed healthy demand from institutional and retail investors during the bookbuild. One factor could be that the market was coming to terms with the changes in the guidelines vis a vis allocations to institutions.

The new SEBI [the Indian regulator] allocation formula does not permit any discretionary allotment. Hence, investors who applied looking for very short term gains could have, in some select instances, caused downward price pressure on day one by selling substantial quantities. This has changed because bankers now try to line-up buyers whose demand was not satisfied with the IPO allotment they received to "take out" any investors who want an early exit.

How much capital-raising have you participated in this year?

ICICI Securities has had a stellar year. Excluding the funds raised in the financial sector, we are the top fundraiser in number of deals and the funds raised. We have seen a number of deals from the mid-cap segment - Rs3-6 billion ($65-130 million) of funds raised. We have also completed 9 GDR transactions, especially noteworthy given that we only moved into that market in the middle of last year.

Do you think investor appetite for paper could be saturated and now diminishing?

We do not see that happening at the moment. At the same time, we believe it is important to keep widening the net and bringing new investors to the table. For example, we handled the first listing by an Indian company on the Dubai International Financial Exchange (DIFX), Man Industries which we led jointly with Dubai Bank. The company was a natural fit for DIFX because it has trading links with the Middle East and a market for its products there. The offering was very well received by high net worth individuals and others in that region. Similarly, we are optimistic that Singapore Exchange will develop into an alternative to Luxembourg and London and bring new investors to the table.

Nervousness in the region about India is increasing daily especially as the recent stockmarket spurt has been in a very short period of time, often deemed symptomatic of a bubble. What is ICICI Securities view on valuations?

All fundamentals suggest that the economy will continue to deliver. Corporate performance is strong with results in line with expectations, liquidity in the system is good, more international investors are coming into the country and there is more retail participation at every level in financial instruments and markets. We see no reason for alarm. There could be some ups and downs during the course of the year in specific stocks but û in general û we remain optimistic.

Recently a number of firms have entered India or beefed up operations - Credit Suisse, Lehman, Goldman Sachs and others. As a purely Indian investment bank do you see your equity capital markets business suffering?

Investment banking in India is still a relationship-driven business and we believe our presence in the country for a number of decades has given us a depth and breadth of relationships which will continue to stand us in good stead. Further, more than one third of an issue is reserved for retail investors and through ICICI Direct and ICICI Bank¦s branch network we have unparalleled distribution reach. Our forays into the international markets (eg GDRs) have also been successful. The entry of new players is an acknowledgement of the market potential in India, something that we have always been convinced about. We're not losing any sleep!
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