11 min read.Updated: 08 Aug 2014, 11:46 AM ISTIra Dugal
Global investors are snapping up Indian equity and debt sales in a vote of confidence that the economy is set for a turnaround under the new government
Mumbai: In January, State Bank of India (SBI) sought to raise ₹ 9,600 crore ($1.75 billion) through a qualified institutional placement (QIP), or a sale of shares to institutional investors.
To some, it seemed an audacious attempt to try and raise such a large sum in one shot. But then, this was India’s largest lender, whose biggest shareholder is the Indian government. It seemed like a safe bet. The issue would sail through, many bankers suggested before the QIP hit the market.
As is customary, the issue opened after the stock markets closed in India, in time to be marketed to European and US investors. Typically, such issues close early the next morning. Except that this one didn’t. Bankers suddenly became unavailable to take calls from journalists and no information was forthcoming. A few days later, a filing by the bank to the stock exchanges showed SBI had raised just over ₹ 8,000 crore ($1.3 billion), with more than 40% of the shares on offer bought by state-run Life Insurance Corporation of India (LIC). Many observers termed it a bailout.
Six months later, when GMR Infrastructure Ltd, a high-debt company in the high-risk infrastructure sector, tapped the markets for funds, the response was dramatically different. The company, which was looking to raise $200 million via a QIP, received demand for $378 million of shares from foreign investors alone. After picking and choosing the investors, GMR raised $250 million.
“The perception about India has changed in multiple ways… There is huge interest and high expectations from investors in Asia, US and Canada," said Madhu Terdal, chief financial officer at GMR, adding that 60% of the company’s QIP had been allotted to investors in Asia and the remaining to North American investors.
A few things changed in the six months between when SBI chose to tap the market and when GMR did, say bankers. Not only is India looking more promising to investors relative to other emerging markets, there are hopes that the new government will help resolve domestic economic challenges and revive growth. The result has been a surge in equity and debt fund raising, the likes of which has not been seen since 2009.
“The constellation has fallen in place. One big factor is that India is looking better vis-à-vis most other emerging markets. Investors are underweight Russia due to the Ukraine issue; China due to growth and credit concerns; Brazil and Indonesia have their own political and economic issues. Hence, in comparison, India is looking much better," said Nilesh Shah, chief executive officer of Axis Capital Ltd, which has led seven of the 11 QIP issues so far this fiscal year, including that of GMR.
Shah added that ever since the new government had come in, there were expectations among investors that the operational environment for many of these companies would improve on account of the steps being considered by the government to revive investment and growth in the economy.
The Indian economy, which grew less than 5% for two consecutive financial years, has been plagued by high inflation, high interest rates and delays in project clearances, which brought private investment in the country to a near standstill. Investors expect some of that to change over the next 12-18 months. While signs of a growth revival are yet to emerge, inflation has softened marginally, leading to hopes of lower interest rates by the end of the year. The recently elected National Democratic Alliance (NDA) government led by Narendra Modi is also trying to revive infrastructure by speeding up project clearances and incentivizing banks to lend for long gestation projects.
Post-election queue for QIPs
This hope of change has led to renewed foreign investor interest in equity of Indian companies.
On the stock exchanges, foreign institutional investors (FIIs) have bought a net of $12.1 billion of equity, driving the benchmark BSE Sensex up by 23% so far this calendar year.
While buying into equity on the stock exchanges had picked up even before the election verdict was announced on 16 May, the weeks post the verdict have been dominated by institutional placements.
Between May and July, companies have raised or were in the process of raising a cumulative ₹ 16,430 crore via QIPs, according to data from Prime Database. So far this year, ₹ 24,543 crore has been raised by companies selling shares through this route, compared with ₹ 8,075 crore in 2013 and ₹ 4,704 crore in 2012. In 2009 and 2010, Indian firms had raised ₹ 34,675 crore and ₹ 26,147 crore, respectively, through this route.
The window to raise equity capital has come as a big relief for Indian companies, who, over the past few years, have seen a sharp increase in debt levels and interest costs. In a 28 April report, the International Monetary Fund (IMF) warned that high debt at some Indian firms may pose a risk to the country’s economic stability. One-third of corporate debt in India has a debt-to-equity ratio of more than three, the highest degree of leverage in the Asia-Pacific region, IMF said.
No surprise then that the debt-laden companies have been the first to go tap the market. Reliance Communications Ltd, for instance, raised ₹ 4,808 crore in June and said proceeds would, among other things, be used to reduce the ₹ 36,822 crore of debt that the company had as of 31 March. Idea Cellular Ltd, with ₹ 18,775 crore debt, tapped the markets to raise ₹ 3,000 crore. Infrastructure firms such as Jaiprakash Associates Ltd have also used the turn in the markets to raise ₹ 1,500 crore, as one step towards reducing debt which added up to ₹ 61,100 crore at the end of March. Other issues in the pipeline include one by Hindalco Industries Ltd, which is looking to raise ₹ 5,000 crore. Hindalco had consolidated net debt of ₹ 63,348 crore as on 31 March 2014.
“Any company that is in the growth phase needs capital. In the last 12-18 months, there has been hardly any access to equity capital and, as a result, most companies have relied on debt. That window for equity has now opened up and promoters are making use of it. I would say it’s reopening of business as usual," said Rujan Panjwani, executive director at Edelweiss Financial Services Ltd.
To be sure, a similar euphoric environment for fund-raising was seen in 2009. A strong election verdict, at that time in favour of the Congress party-led United Progressive Alliance (UPA), had raised hopes of important economic reforms being undertaken. In response, the benchmark BSE Sensex had surged nearly 20% on 18 May 2009—the first trading day after the election verdict.
In the weeks and months that followed, companies rushed to raise money. An aggregate of ₹ 38,675.75 crore was raised via QIPs that year, with most of the fund-raising completed between May and December. Real estate firms had kicked off the fund-raising cycle then, with companies like DLF Ltd, Unitech Ltd and Indiabulls Real Estate Ltd raising equity.
“At this point in time, most investors who have been investing in India are deploying cash. This may also be because asset allocations for India were lower before the elections and investors may have now taken a call to increase asset allocations into the country," said Vinay Menon, head of equity capital markets at JPMorgan Chase and Co.’s Indian unit, adding that even in 2009, there had been a surge of fund-raising starting with QIPs, which was followed by a pick-up in the primary markets. “If you look at companies that have raised capital, it is the normal trend. The large caps come first, then the mid caps and eventually the floodgates open for IPOs (initial public offers) as well," said Menon
Some bankers like Menon and Shah also say that the pool of investors looking to invest in India is slowly widening, with investors from newer geographies like Canada and the Middle East starting to test the waters. For now though, long-only investors and hedge funds from the US and Asia are dominant.
Coming next: divestment and IPOs
Apart from debt-laden companies, major beneficiaries of the upbeat mood in the equity markets include the government itself.
The government’s own finances have taken a beating due to a slowdown in tax revenue as a result of slower growth and heavy spending on social sector schemes and subsidies. The result has been a widening of the fiscal deficit. While the new government has projected a fiscal deficit of 4.1% of gross domestic product (GDP) for fiscal 2014-15, meeting that target is heavily dependent on raising non-tax revenue via disinvestments in state-owned enterprises. The target for the year has been set at a hefty ₹ 43,425 crore.
“It should be possible to reach the divestment target provided one prices the issue well and markets it appropriately. The success of the Power Grid Corp. of India Ltd FPO (follow-on public offer) and PSU ETF (public sector unit-exchange traded fund) has made retail and institutional investors look to the PSU sector. In the case of government companies, there is no concern over the business; so investors should participate willingly, provided timing and pricing is right," said Shah of Axis Capital.
In addition, state-owned banks which need equity capital to meet the new international capital norms may also tap the markets through follow-on public offers.
“Government issues can see phenomenal demand. The names being talked about are large cap names, and the government is being smart about which companies they bring to the market. Metals and mining, for instance, is in vogue. So a company in that space will get a good reception," said Menon of JPMorgan.
The IPO market is showing signs of life, too, after two years of lacklustre activity. Close to 14 privately-held companies plan to raise about ₹ 10,000 crore through initial share sales over the next 12 months, Mint reported on 23 July. In 2012, 11 companies raised a combined ₹ 6,835 crore, and in 2013, three raised ₹ 1,283 crore.
“One of the things that investors are looking for is quality issues. A lot of people have been investing in the same companies over and over again and need new investment options. In that context, the restarting of the IPO pipeline is a good thing. We need to expand the pipeline and add more companies that investors can look at," said Panjwani of Edelweiss.
Debt: not left behind
It’s not just the equity markets that are benefiting from the improved sentiment around the Indian economy. Companies looking to raise foreign currency debt via bonds or loans have also benefited by the change in mood.
Between January and June, close to $16 billion has been raised via external commercial borrowings (ECBs), according to data from the Reserve Bank of India (RBI). Foreign currency bonds issues by Indian entities have been flying off the shelves, and the cost of raising overseas debt has also come down substantially.
In May, Bharti Enterprises Ltd raised nearly $2 billion in dollars and euros, following which ONGC raised $2.3 billion in early July, making it the largest dollar bond issue out of India. Last week, Tata Steel Ltd also raised $1.5 billion via foreign currency bonds as part of a larger plan to refinance the over $5 billion debt it had taken on to acquire Corus Group Plc. So far this year, $12.06 billion has been raised through foreign currency bonds alone, compared with $12.01 billion in the calendar year 2013, according to data from Bloomberg.
“...global investors have significantly ramped up exposure in the Indian credit space. This is evident across both debt FII flows as well as in the significant tightening in credit spreads for Indian borrowers offshore," said Chetan Joshi, director and head, debt capital market, HSBC India, adding that the increased interest from foreign investors had also led to a 125-150 basis points decline in the cost of raising overseas money even for investment grade companies.
One basis point is one-hundredth of a percentage point.
“…issuers have continued to expand their borrowing profile into alternate currencies such as the euro and Australian dollars, with the resultant widening of investor base. In loans, we have seen increased participation by more lenders, including Middle Eastern banks, which has propelled first half loan volumes up 34%," said Joshi.
Along with higher rated companies, issuers with lower ratings are also using foreign currency bonds to lower their cost of funds. In July, Rolta India Ltd raised $300 million, following which two other sub investment grade firms—Global Cloud Xchange ($350 million) and Greenko ($500 million) raised money. GMR is also looking to raise $350 million via overseas bonds.
“Anyone going to the overseas market can access funds at 5-6%, compared with 13-14% in India. However, if you are borrowing on a fully hedged basis, the cost differential isn’t much," said Terdal of GMR, adding that borrowings via dollar bonds help companies manage cash flows better. Unlike a loan, in the case of a bond issue, while interest payments are periodic, companies repay the bulk borrowing amount only when the bond matures.
To be sure, interest in Indian debt had picked up even before the election euphoria as stability in the currency markets helped reduce the risk for debt investors.
FIIs have also been investing heavily in government debt, as is evident from the $13 billion inflow into government debt since January.
Recently, RBI reshuffled quotas for foreign investors investing in Indian debt by raising the limit for institutional investors by $5 billion to $25 billion. The limit for long-term investors such as sovereign funds and pension and insurance funds, though, was reduced by $5 billion due to limited interest and participation from that segment.
“We are headed for very robust markets. Great equity markets and fantastic debt markets," said JPMorgan’s Menon, summing up the upbeat sentiment among bankers.
Others strike a more sober note.
“Investors have always had high hopes from India, but in the past we haven’t lived up to it. I just hope this time we don’t disappoint," cautioned GMR’s Terdal.