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Credit Suisse’s Sumit Jalan on why Indian QIP market is booming

This year, the QIPs on an average has been of a significantly higher size.

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Last Updated: Nov 27, 2019, 01.33 PM IST|Original: Nov 26, 2019, 03.46 PM IST
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Globally speaking, close to about $17 trillion of paper is on negative yield. So, when a foreign investor looks at relative market positioning, India still offers that growth and moment, says Sumit Jalan, Co-head of India Investment Banking and Capital Markets, Credit Suisse. Excerpts from an interview with ETNOW.

The lay of the land is that Rs 30,000 crore has come into the Indian market from FIIs. India economic data is not impressive at all and hopes of a modest recovery also got diminished by earnings and by the data points that we have got from auto companies, airline companies and insurance companies. If the near term is unlikely to change, why is the interest in the QIP market so strong and so unreal?
There are few points around this interesting question that there is a bit of a dichotomy between the financial economy and the real economy. It is not just a question of whether there is a slowdown in the economy or not. Globally speaking, close to about $17 trillion of paper is on negative yield. So, when a foreign investor looks at relative market positioning, India still offers that growth and momentum. Generally speaking, the investing community has a preference and the QIPs have been of a significantly higher size.

Last year in 2018, the average QIP size used to be roughly about $80-100 odd million. There were 25 QIPs, raising $2.5 billion. This time, there has been only 10 QIPs, but they raised $4.5 billion which means high quality papers are coming in the market and the investing community loves it.

The large blocks which have happened are largely in Bajaj Finance, insurance and in some promoter blocks. What is your understanding about where the flows are likely to move?
Sectorally, there is a supply side and a demand side. If you really look at it, growth related capital has been raised from financial services. Some from other capital hungry sectors like real estate this year also saw a couple of transactions being done. But the secondary story is very different. When you say insurance and AMCs, many of these are not businesses which need too much of capital. That is why you find that there is a significant amount of secondary supply, given that the valuations have been rich and many of these private equity investors came in early and have definitely gone through both cycles and are looking at valuations post exit. We do see a significant amount of secondary supply from either promoters or sponsors. Lenders are also exiting from their collateralised inventory positions. So, that level of secondary supply will continue. Coming to insurance as a space, we find that their specific owners are definitely looking at it.

In which sectors or pockets might we actually start to see some fundraising activity coming in?
In the last couple of quarters, corporate India is in a hunker-down mode but in the last few months, I am seeing a bit of a green shoot or animal spirits coming back. There is a little bit of desire for some capex and moving forward in the context of absorbing greater growth, one is finding some of the traditional sectors like infrastructure, manufacturing, industrials and some better quality real estate papers.

I do not think that at promoter level, corporate India is fully deleveraged as yet. FY18 and FY19, specifically FY19, saw a lot of activity on that front. I think FY20 is expected to see that process continue.

-Sumit Jalan

There are 75 odd companies which have taken enabling resolution for doing QIPs. If you think about it, FY18 had 25 issuers, FY19 had 10 and we have 75 outstanding enabling resolutions. Unlike the last couple of years, it is not BFSI focused, it is a lot more broad-based. Some of the sectors are traditional sectors which will bounce back in the context of raising more capital.

What happens when this entire divestment exercise is undertaken by the government which is right now only an idea on paper? Hopefully, we should see the execution soon. Do you think that is when we are going to see more such deals come in? Will that bring the animals spirits back to the market?
India is a growth economy and therefore investors get enamoured more by growth capital supply rather than any secondary nature -- be it divestments or be it sponsor/promoter blocks. But the supply has been mostly secondary in nature which means even the divestments leads to more excitement in the market.

From the investor side, they are segregating the quality of papers and businesses. Some of the divestment assets are in certain instances, are near monopoly businesses. Investors will definitely be looking forward to supply of shares of some of these interesting businesses.

Where do you think need-based fund raising is likely to happen? Which are the sectors and companies where you want to raise capital because that is growth capital?
As you said, one is growth capital, the second is balance sheet fixing capital and for lenders, it has been raw material too. On the growth side, it is more in manufacturing or infrastructure space, where there is a desire to figure out ways to deploy more and more.

Some of these sectors in the last three or four years have not seen much of primary equity going in. Majority of these have been affordable private equity/private capital. That is the supply. The 75 odd enabling resolutions is reflective of the fact that a good percentage of primary capital will go into the economy. A majority of these are from traditional spaces like industrials, manufacturing. There are one or two pharma issuers as well. Last few years have seen the services sector dominating.

I do feel that in 2020, manufacturing and infrastructure could take that place

We have seen a couple of deals from promoters – one in Bajaj Consumer, one in Zee. A couple of deals have happened in Emami. Are you also getting a sense that a lot of promoters with pledged shares are coming to the market to raise capital?
There is a bit of haves and 'have nots' divide in corporate India. An issue with promoters may not necessarily be a company issue. In a lot of these situations, the company balance sheets are squeaky clean with no debt. Yet, there is a promoter supply which is happening because of promoter level borrowing. I do not think that the entire deleveraging at the promoter level is yet done and that inertia of motion will continue.

There will be more and more supply of promoter sell downs. I hope it is more for good reasons of deleveraging rather than lenders taking over and selling which are generally speaking in a more distressed environment. I do not think that at promoter level, corporate India is fully deleveraged as yet. FY19 saw a lot of activity on that front. In FY20, that process is expected to continue. For those companies raising primary capital, if the company balance sheet is strong, it is less likely that distinction has to be made. Even if the promoter is struggling, you will not find primary raise in those companies.

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