Mumbai: Indian companies are riding a wave of overseas liquidity and raising billions of dollars in fresh equity, although fund managers and bankers say investors are getting picky, and not every deal will succeed.
Foreign funds, attracted by the domestic consumption-led rebound story in India, have been a crucial driver in the 89% rally in Indian stocks since an early March low, pouring roughly $8.7 billion into the market over that period and powering an 8.1% appreciation in the rupee
Overseas investors are the biggest buyers of new shares from India, where companies have raised more than $7.5 billion in equity so far this year, surpassing the full-year total for 2008, according to Thomson Reuters data. That is still far short of the record $32.4 billion they raised in 2007.
Dozens more Indian firms hope to come to market with equity sales over the next few months to fund growth and repay debt.
“The liquidity is very strong with investors,” said Vedika Bhandarkar, head of India investment banking at JPMorgan, which has co-managed a combined $2.34 billion in overseas India share sales since late last week by Sterlite Industries, Tata Steel and Tata Power.
Issuance in recent months has come almost entirely through follow-on offerings by listed companies, but numerous companies are dusting-off IPO plans, which take several months to develop, and Bhandarkar said she expects to see a spate of new listings across industries in October and November.
IPO hopefuls include Adani Power, which aims to raise $623 million. Power firm NHPC Ltd and Coal India Ltd, both of which are state-owned, could raise more than $1 billion between them.
“There is a huge supply lined up for the rest of year, but our sense is not everything will get done and investors are going to push back until and unless they are convinced of the company, what it plans to do with the money and the valuation,” Bhandarkar said.
Some recent qualified institutional placement (QIPs) plans failed to gain traction. GMR Infrastructure tried to raise $500 million but scrapped its deal after failing to generate sufficient demand. Lanco Infratech deferred a planned $400 million issue last month, sources said.
Michiel van Voorst, who manages a $600 million Asia-Pacific portfolio for Dutch fund manager Robeco in Hong Kong, kept to the sidelines during a spate of equity issuance from India in June.
“For me, valuation is still an issue in India, so it’s more now becoming a momentum game,” he said. “And (there are) still people waiting on the sidelines to get in. It’s generally not the type of market I like best, to be honest,” he said.
Indian companies trade at about 17 times forecast earnings, compared with nine times in March and the recent historical average of roughly 14 to 15 times forecast profits.
Foreign money, domestic play
While economic growth slowed to 6.7% last year after three years of expansion of at least 9%, India’s economy has been spared the worst of the global downturn thanks to robust domestic demand. The government has said the country is on track for growth of 7% in the current fiscal year.
Domestic consumption makes up almost 60% of country’s economy, compared with 35% for export-focused China. Some investors say India remains attractive in the absence of nasty surprises in the US economy that could reignite risk aversion.
China is also seeing a rebounding economy, a surging market, and a flurry of share sales. While domestic A share offerings there are off-limits to overseas funds except for qualified foreign institutional investors (QFIIs), foreign funds are major buyers of share sales by Chinese companies listing in Hong Kong.
Bankers said that in general, an Indian IPO needs to be taken up about 60 to 70% by foreign funds in order to succeed, given the lack of depth in a domestic institutional investor base where local mutual funds hold just $33 billion in equities.
Foreign institutional money also dominates in follow-on deals. Property developer Unitech raised $900 million in two share sales since April, with overseas investors buying nearly 90% of the offerings, bankers said.
Rahul Chadha, who manages roughly $1.2 billion in India-focused funds for South Korea’s Mirae Asset Global Investments in Hong Kong, bought into recent share sales from India in the infrastructure and property sectors.
“If we have something which ties into a basic premise of stable global markets and a recovery in the Indian economy and the sectors which we expect are going to benefit,” he said, “any leading companies ... if they come with paper at reasonable valuations, we have taken an opportunity to add to our existing holdings.”
Douglas Cairns, Asia and emerging markets equities investment specialist at UK fund manager Threadneedle Asset Management, said the firm’s $1.48 billion Asia fund continues to see inflows and is looking at equity issuance on a company-by-company basis.
“In terms of risk appetite it certainly seems to be there still and in terms of the Indian market, yes, for companies that are raising capital with good prospects on a specific basis, I think the appetite is still there, as foreign investors,” he said.