Corporate lending to depend on borrowers' track record: JP Morgan's Kulkarni

Kaustubh Kulkarni, senior country officer for India and vice-chair for Asia Pacific, JP Morgan
Kaustubh Kulkarni, senior country officer for India and vice-chair for Asia Pacific, JP Morgan

Summary

Access to capital in the Indian market has been good, and primary capital market activity is doing well. After the upcoming elections, there may be a busier 2024 in terms of capital raising.

Mumbai: Indian corporations have become more prudent in their approach to take on debt for new projects, leading to more caution towards fresh investments. In India, JP Morgan, the world’s largest bank by market cap, said clients are becoming more aware of their debt obligations, prodded by regulatory changes. JP Morgan’s senior country officer for India and vice-chair of the Asia Pacific Kaustubh Kulkarni said in an interview that the bank would look at track record of companies to fund their expansion plans. Edited excerpts:

What do you think of Indian equity markets, and do you expect capital raising to pick up pace?

In India, markets are at a reasonably healthy level from a valuation multiple perspective. Access to capital has been good and primary capital market activity is doing reasonably well, whether in terms of the amount raised till date or the number of new public offers likely to come in 2-3 months. The upcoming election process is likely to go on for 2-3 months. Post-elections, we may see a busier 2024 in terms of capital raising, assuming the election result is an appropriate government with the stability to lead.

Are corporates more keen to borrow locally, or are they looking at tapping global resources?

Larger Indian companies have good access to both local and international bank funds. But if SOFR (secured overnight financing rate) is at 5.25% or 5.5% and with credit spread added, the dollar cost on a fully-hedged basis is far more compared to borrowing at 8-8.5% in Indian market. The tendency, therefore, will be to borrow from the Indian market at that level unless companies have meaningful dollar-denominated revenues. In that case, one may be fine to borrow at 5.5-6% because primarily, one will have dollar or foreign currency revenues to address financing costs.

What kind of flows are you expecting from India’s inclusion in the JP Morgan emerging market bond index? Is the excitement justified?

The numbers are quite transparent because total emerging market investor debt, which tracks JP Morgan Bond indices is quite public. It is at $275-300 billion. So, if you target 10% weightage, you will be getting $25-$30 billion FPI (foreign portfolio investment) inflows into government FAR (fully-accessible route) bonds. The flows will take time because it takes a year for bondholders to start tracking indices. If you are looking at a June or September 2024 timeline for the final index inclusion process to be completed, then the flows will come 12 months after that. What happens in the interim is investors start positioning for index inclusion, so some flows start coming in earlier, and the bulk of flows at a later point. The numbers are quite large and if that is the kind of funds that flow in the next 12 to 24 months, then it is not a small number. Then you get a new class of investors, and you also get dollar flows. Having passive flows coming into the economy is a good thing because it can be managed much better than active flows as they tend to be less volatile.

Indian firms have been conservative on capex. Will it continue?

It is about demand-supply dynamics and capacity utilization. If you look at steel and cement, a fair bit of greenfield, brownfield and other investments are happening. What we need to understand is that capacity utilization is important, and profitability and returns on capital that one is investing are also equally important. One thing that is very clear is that Indian companies want to operate with prudent leverage and capital structure. Regulatory changes has created a discipline in corporates in terms of being prudent about their investments.

Most companies, at least those we talk to, are willing to invest in only those projects that they know they can service properly, and will start generating free cash flow in a reasonably finite period. That discipline is back and firms are clearly going to be cautious about investments.

Given how ambitious Indian entrepreneurs are, getting into unrelated businesses, will JP Morgan be comfortable with their plans?

We will ultimately go back to basics in terms of track record, to see whether companies or founders asking for funding have the proven ability to execute properly, the business model they are implementing, and how competitive it is. It will also include counterparty risk that the business is taking.

Your peer foreign banks are quite bullish on Indian startups. Do you share their optimism?

Any startup business is interesting due to the prospect of the opportunity they are trying to create. Also, one needs to be careful in understanding the business model and governance practices. Not every startup is looking for money and many startups are funded via equity. They are not dependent on debt, but on settlement solutions, payment gateway solutions and other integration with the ecosystem. Startups could look to benefit from their engagement with banks like JP Morgan. 

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