Indian companies that flocked to the equity markets to fund growth during the three-year bull run will increasingly raise debt in order to leverage strong balance sheets and finance buyouts, a Citigroup banker said.
The ongoing sell-off in global stocks, with India among the hardest-hit markets, should also make debt issuance look attractive to companies planning to raise capital.
Pramit Jhaveri, head of investment banking at Citigroup in India, said he expected robust M&A (mergers and acquisitions) activity in India to continue, with global companies increasingly buying to tap the country’s domestic consumption growth.
“The last two to three years have seen significant amounts of equity being raised. Indian companies are, however, extremely comfortably levered currently, and therefore we expect to see a significant amount of debt issuance going forward,” Jhaveri said.
While they rebounded on Tuesday, stocks have fallen 16% since their all-time high on 9 February, and a prolonged slide could spoil the equity-raising hopes of firms in India and elsewhere when faced with a risk-averse market.
“To a certain extent there will be an impact, because this correction has happened at a time when there is a significant amount of issuance activity planned. This will get people to pause for a while, which is not a bad thing. At the same time, it is too early to start worrying about,” he added.
“Equity issuance that was imminent may have to take a re-look and apply a bit of a wait-and-watch,” he added.
Jhaveri said a spate of acquisitions by Indian companies needed to refinance short-term borrowings should help drive debt issuance this year. Since the start of 2007, Tata Steel,Suzlon Energy Ltd and aluminium producer Hindalco Industries Ltd have announced buyouts worth a combined $16 billion (Rs72,000 crore).
“If you look at recent cross-borders deals, that’s a significant amount of debt that needs to be raised,” he said.
Indian debt capital markets activity rose 28% to a record $13.7 billion last year, according to Dealogic, an IT and communications services provider, but issuance was dominated by banks and a $2 billion offering from manufacturer Reliance Industries.
Banks are still expected to be avid issuers. Early this year, ICICI Bank generated orders of $8 billion for its $2 billion issue as global investors took up the offering amid a relatively scarce supply of overseas Indian debt.
Citigroup topped the Dealogic league tables for core investment banking activity in India last year and was second behind local player ICICI Bank in debt underwriting.
The market going forward should broaden, said Jhaveri, predicting that between six and 12 bond issues this year could top $500 million. He expects a similar number of big initial public offerings.
On the M&A front, Jhaveri said the recent flurry of Indian mega deals was neither an aberration nor a trend. “$15 billion and $10 billion, those are going to be fewer, but $1 billion-plus, you’re going to see. I think you’re also going to see the reverse, which is multinationals doing the same in India,” he said.
British cellular giant Vodafone Group Plc. last month agreed to pay $11.1 billion for control of the Indian operations of Hong Kong’s Hutchison Telecommunications International Ltd. Jhaveri said in certain sectors such as information technology, bigger companies grow faster, which would drive buyouts.
“There are enough sectors where this is going to happen, whether?it’s industrials, whether it’s IT services, whether it’s health care,” he added.