Mumbai: JPMorgan Chase & Co.’s India chief executive officer Kalpana Morparia comments on the investment picture this year amid a glut of capital raisings. There’s $35 billion (around Rs1.56 trillion) of capital issuances, including $8 billion by the government, in the pipeline, according to Morparia. She said in an interview that the issuances should be spread out to help the market absorb them. Edited excerpts:
We have seen some good numbers from sectors such as auto, cement. The industrial growth numbers are robust. Are you feeling confident about the rest of 2010 or do any elements make you apprehensive?
No, in fact, things look pretty good. There is a strong pipeline of capital investment. There is a strong pipeline of capital issuances as well
Do you think all that capital which is being raised over the next two-three quarters will be soaked up?
I prefer to look at the pipeline for the 12-month period beginning 1 April. We see a pipeline of close to $35 billion, which is a mix of about $8 billion of government divestment, $15 billion of follow-on offerings (FPO) and roughly about $12 billion of IPOs (initial public offerings). If you look at the prognosis on FII (foreign institutional investor) flows into the country, the domestic institutional investment seems like a pretty good match.
Market inflows: JPMorgan Chase Co.’s Kalpana Morparia says capital inflows in the current fiscal appear to be stronger than in the last one. Rajkumar/Mint
Towards which do you sense the greatest leaning though? We have seen a couple of these disinvestment processes not go through with sufficient demand. Is there a leaning right now between follow-on and IPOs versus the QIP (qualified institutional placement) route?
The divestment will primarily follow the offer for sale route because you indeed do want the ability to get a wider participation. Much has been made about there being not enough interest by retailers and HNIs (high networth individuals); I view the domestic institutions’ participation as being very positive because that is money going through intermediation to a very large pool of policy holders and investors in mutual funds.
The broader objective of the government divestment programme is to reach a wider public audience. Whether that happens through a direct order placed or intermediation of life insurance companies or mutual funds, to my mind, doesn’t matter so long as you are addressing a wider public audience.
Do you sense that the secondary market may have to suffer this year because of the amount of paper that is hitting the market from the primary side?
Can we just put that paper in the primary markets in perspective? So if you look at markets like China, Korea and Taiwan, in the last decade, the amount of new issuances as a percentage of market capital ranged between 3% and 5%. Given this number of $35 billion and $1.3 trillion of market capital, we are talking about something like 2.6-2.7% of market capital.
Given India’s growth trajectory, the huge consumption and capital expenditure plan that we have, I see no reason why India should not now look at something like 2.5-3% new issuances to market capital percentage ratios. It has been achieved in other emerging markets.
However, it probably needs to be paced out better. So you cannot absorb $8-10 billion in just a couple of months.
On the demand side, can you say how that $35 billion would be broken up between domestic institutions, FIIs, etc.?
The (expected demand from) domestic institutions is somewhere between $13 billion and $15 billion. This is without any of the pension money coming into the market. With reform in pension over the next couple of years, I am sure we will see that going up. The broad indication is roughly about $25 billion of FII flows. Some of that, of course, will go in direct secondary market purchases outside of the planned issuances.
Once this capital raising is done, not just by the government, but by the private sector as well, do you think it might restart the next capex cycle in a major way because there is a lot of debate in the market on when the next big infrastructure capex cycle starts off here?
If you look at the pipeline of projects amongst banks, it has steadily been increasing. Given a prognosis of whatever—$600 or $700 billion over the next four-five years—we are already seeing the first signs of this. Even if you look at the sectoral break-up of IPOs and FPOs, it is driven a lot by physical infrastructure which includes, in this case, real estate as well... The other large part is the power sector.
If we are indeed seeing that and you marry that with the kind of growth we are seeing in sectors such as cement or auto, for instance, do you think the market is not adequately aware of how much rates might have to move this year?
Rates moving this year is somewhat of a given and I feel, in some ways, the market has factored that in. That is why after the hike of a 0.25 percentage (by the Reserve Bank of India in March), after, maybe, a day or two, given the liquidity and the strong growth momentum in the market, you have seen the MSCI India (index) outperform even the MSCI Emerging Market (index). So the market has pretty much factored in the rate hikes.
It is always tough to map inflows into the market, of course, whether it is primary or secondary, but one parallel development has been the way the rupee has been moving recently. In that context, do you think this could be a much stronger inflow year than even last year was?
Certainly, this year appears to be a stronger inflow than last year. Last year, if you remember, the major part of the inflow was in eight-nine months of the 12 months’ period. This year we feel that it will be much more spread out. So barring any unforeseen circumstances, I see no reason why the momentum that we have seen over the last seven-eight months should not continue in the years to come.
Aside of the equity side, for capital issuances, which you have said would be quite robust, where does that leave the pick-up in bank credit growth, which a lot of bankers have been talking about, but has so far been more or less illusory?
When we look at bank-credit growth, we just seem to be focusing only on bank-credit growth. If you look at corporates taking in CPs (commercial papers) and other kind of instruments, their own very strong cash flows that they have managed to generate with a lot of belt tightening over the last 18 months, if you look at just the cash accruals on some of the other market-based instruments that they are accessing, the picture doesn’t look as dismal.