India will continue its ECM bull run

Citi''s Indian head of ECM explains why 2006 is shaping up to be another record breaking year for equity issuance.

In recent weeks India's stock markets have staged a remarkable comeback after falling 10% over the course of two weeks in October. The Sensex has shot back past 9,000 and those who argued that India was entering a sustained downward trajectory are having to re-think their strategy. Here Ravi Kapoor, managing director and head of equity capital Markets for India at Citigroup, offers his views on issuance trends and market direction in 2006.

How has 2005 been for equity capital raising by Indian companies?

This has been a good year with the quantum of fund raised standing at $12 billion year to early December, including local and cross border equity and hybrid transactions. I expect 2005 to close with $15 billion raised from the markets, a significant improvement over the $8 billion raised in 2004. I would highlight here that the 2004 and 2005 numbers are not strictly comparable since the 2004 number includes government divestments of $3.5 billion to 4 billion. In 2005, there have been no privatization offerings as the new government has spent the year fine tuning its approach to privatization and has not yet brought any paper to market. Thus on a like to like basis 2005 has been a landmark year for equity capital raising.

What is your outlook for 2006?

Pipelines for issuances are good and the outlook is robust, both at a company level and for the Indian economy as a whole. The rebound in the stock markets from a couple months ago heralds this fact. Sectors that are looking especially strong are capital good sectors such as banking and automobile, which are generally a surrogate for the overall economy.

What's the current perception of India among the institutional investors you interact with?

The number of investors with a dedicated India focus has increased. India's downsides - the fiscal deficit, lack of infrastructure creation and political instability (with a coalition government at the helm) - seem manageable to the fund management community and this is reflected in their willingness to commit capital to the country.

Which sectors do you think will witness large capital raising in 2006?

I anticipate that telecom companies will raise capital given their need to make investments - this could be listed companies issuing further capital or unlisted companies doing IPO's. The banking sector will continue to be an issuer especially given the need to comply with the new Basle norms. Infrastructure play companies are also expected to raise capital.

In the last few weeks India's Finance Minister Chidambaram has also indicated that a consensus has been reached on the route forward for disinvestment. A combination of Public Sector Undertakings (PSUs) raising further capital and the government of India selling their stakes in companies will also be seen.

Any thoughts on the types of cross border issuances we can expect from India?

Currently ICICI Bank's equity issuance is over shadowing all other issuers, but going forward the country's mid cap companies will continue to raise capital cross border with amounts in the range of $75 million to $100 million. These kinds of companies are registering CAGRs of 25% to 30%, fuelled by India's burgeoning middle class. They're going to find it cost effective to finance their expansion plans through equity or hybrids.

Large caps will also raise capital both for expansion and acquisitions, particularly to finance cross border M&A. Many of our local clients are now confident of increasing their footprint to encompass other global markets and are continuously on the lookout for suitable opportunities to secure a foothold internationally - avenues to do this could include acquisition of facilities, brands, customers, etc. Increasingly, companies are turning to the capital markets to fund such activities.

Do you foresee any problems managing issuer expectations with respect to pricing in the context of the bull run on the bourses?

The stock markets are in some instances making issuers aggressive in their valuation expectations. Having said that, sound companies understand the need to benchmark their pricing against relevant comparables. I feel companies understand the need to leave something on the table especially if they plan to approach the markets again and again.