India: Asia’s ECM bright spot

Issuance activity picks up backed by strong domestic and international fund flows.

India has been the noticeable bright spot for Asia equity capital markets in 2017 and the momentum is likely to continue into the fourth quarter according to investment bankers.

As FinanceAsia has been reporting in a series of autumn previews, Asia has largely been able to hold its own so far this year thanks to India and South Korea.

India currently stands in second place in the issuance league tables with a 24.61% market share in the yea to end-August, double last year’s 12.21% level according to Dealogic figures. South Korea is third on 18.59%, although bankers expect issuance to tail off during the fourth quarter.

If issuance continues at its current rate, India is on course for a record-breaking year in terms of the number of deals executed (see table one). At 149, the number is already very close to 2013’s record breaking 156.

Yet 2013 was also characterised by small deals sizes, with overall issuance volume of only $9.74 billion compared to $14.86 billion to the end of August 2017. 

This is one aspect bankers agree has recently changed for the better.

Aaron Arth, head of the Asia financing group at Goldman Sachs said: “It’s very noticeable how issuance sizes are increasing. Three to four years ago, most transactions were small in nature - anywhere from $75 million to $150 million in size. Today, many financing transactions are much greater in size and liquidity.

"Year to date, we've seen six transactions north of $700 million, reflecting the market depth and attractiveness broadly.”

However, 2017 still has a long way to go if it is to hit the $24.87 billion India recorded in 2010 when the government’s privatisation programme was at full tilt from offerings such as Coal India’s $3.46 billion IPO.

“India has had a phenomenal year,” commented Alex Abagian, head of Asia Pacific equity syndicate at Morgan Stanley in Hong Kong. “Volumes have been rising strongly across all equity products, both in terms of the number of transactions and importantly average deal size, although to be fair they’re coming from a low base.

"We expect this trend to continue with a number of large IPOs slated for fourth quarter pricing," he added. "The IPO cycle has been gaining momentum over the last 12 months and we expect it to continue in the year ahead, underpinned by solid macro economic growth and reforms undertaken."

What has not gained momentum, however, are Indian fee levels, which have not risen in tandem with deal sizes.

Western banks are also now facing the entrance of their Chinese competitors as well. The success of the latter’s international expansion plans has been demonstrated by their growing presence on Indian deals.

Citic is doing well because of its acquisition of CLSA, but Haitong Securities is also now winning syndicate roles as well. It was a bookrunner on Central Depository Services IPO in June and is also on HDFC Standard Life's forthcoming IPO.

Fund flows

One of the reasons why issuance activity has been picking up is because of the underlying market’s strong performance.

In the year to September 13, the BSE 100 is up 25.23%, which puts its third behind Athens and Chile as the standout performer among MSCI emerging market constituent countries.

India ECM IPO and FO Volume
Pricing Date by Year Deal Value USD (m) No.
2004 7,687 53
2005 11,222 144
2006 11,993 167
2007 21,129 146
2008 12,370 66
2009 15,102 109
2010 24,869 150
2011 8,381 85
2012 14,289 94
2013 9,738 156
2014 10,705 128
2015 19,175 131
2016 9,636 145
2017 YTD 14,861 149
SOURCE: Dealogic

There have been particularly strong inflows into domestic mutual funds - topping $3 billion per month of late.

“There’s no recent for these kinds of flows to slow down,” one banker commented. “We view this as a long-term trend and its one foreign institutions have been paying close attention to.

“It gives international investors continuing confidence about investing in the market as well,” the banker continued. “These flows are often going straight into the new issue market, which is very supportive of the autumn’s large pipeline.”

International flows into emerging markets have also been strong ($8 billion net to end August) and India has been a key beneficiary.

Akram Zaman, head of Asia Pacific equity syndicate, Bank of America Merrill Lynch stated: “Investors view India as one if not the best emerging market out there. It’s got strong growth, a democratic foundation and good corporate governance framework.

From an investment standpoint, despite some premium valuations, which exist, it does feel like a good place to deploy capital in the medium term, particularly for companies with strong management teams and sound corporate governance” he concluded.

Tucker Highfield, head of Asia Pacific equity syndicate, Credit Suisse, agrees.

“Investors like India and there are a lot of interesting opportunities there,” he noted. “Its economy is at the same stage China’s was 10 to 15 years ago. And its companies have scale.”

Yet as the bank’s research arm recently reported, India is also one of Asia’s most expensive markets on a price to book versus ROE basis.

The BSE 30 and Nifty 50 are trading at respective price to forward book valuations of 2.8 times and 2.7 times. By comparison, the Asian average (including China) is currently 1.6 times.

Investor appetite will be tested by the autumn’s strong pipeline. In contrast to recent years, there will also be a tilt towards the private sector rather than the government’s privatization programme.

The market is gearing up for a quintet of IPOs from the insurance sector, itself a proxy for a country’s long-term economic prospects. FinanceAsia will examine their prospects in the second part of its India preview. 

¬ Haymarket Media Limited. All rights reserved.
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