‘No 2017-like IPO pipeline in the second half this year’

It is unlikely that this year’s equity fundraising tally will surpass that of last year. ANUJ KAPOOR, head of investment banking at UBS India, tells Samie Modak that rising global and domestic uncertainties could weigh on equity capital raising in the near term. Edited excerpts:

What themes are IPO (initial public offer) investors chasing at this point?

The equity market rally this year has not been broadbased. An excess of 60 per cent of BSE 500 stocks is in the red as compared to the year’s beginning. It is primarily the top six-seven stocks driving the rally for the Sensex.

Investor interest is concentrated on established names and sector leaders. Stocks with a unique story and those dominating their respective sectors or with a very high-growth theme are in demand. But, if these characteristics are absent, even stocks with decent stories are struggling in the absence of market momentum.

Would you put a number to the equity fund raising that could happen in the rest of the year?

Given market volatility, equity capital market (ECM) volumes are likely to be less than those last year. In 2017, there was approximately $11 billion of IPOs and $32 billion of total ECM volumes. I don’t think we will reach these numbers this year. First-half IPO volumes are higher than last year but overall ECM volumes are down. In the second half, I do not expect to see the kind of pipeline we had in 2017.

And, of course, not everything in the pipeline gets done. On the whole, investors are cautious. A number of IPOs have struggled and been either pulled (out) or postponed, in the hope of a more conducive market. Last year, we witnessed a secular bull market and investors who were very hungry for transactions. This year, investors are far more sceptical. In such a market, that is volatile and investor-driven, issuers tend to postpone decisions and investors to stay on the sidelines. But, for the right kind of story and name, there will always be appetite.

2017 was the best year for equity fundraising. Will that year's tally be topped soon?

If the government maintains a pro-reform agenda, (crude) oil prices stay within acceptable levels and there is no global catastrophe, then it is possible that we will see volumes surge in the medium term.

The Indian economy continues to offer huge growth potential and deal sizes are increasing. HDFC Bank recently raised about $2.3 billion. As long as we have a stable government at the Centre, in a high-growth economic backdrop, we should see volumes increase. It is tough to say whether this will take place next year or the year after.

Why are we seeing FII (foreign institutional investor) participation in IPOs go down?

Investors are being selective. Over the past three months, FIIs have consistently withdrawn funds from emerging markets (EMs) across the board. The outflows slowed recently but haven’t stopped. A broader theme of flight to safety is playing out.

EM funds, both debt and equity, have experienced redemptions. However, domestic inflows have clearly buoyed the Indian market. So, at the moment, domestic investors are as important, if not more, than FIIs.

What’s not so encouraging is that while mutual fund flows remain strong, they have tapered from their peaks. In the light of state elections later this year and a general election next year, macroeconomic uncertainties such as the direction of rates and inflation, and possible escalation in tension surrounding global trade, we can expect further volatility in EMs.

When will corporates start coming to the market for primary capital?

With the exception of certain sub-sectors, such as roads and mining, corporate expenditure in India stays muted. Overcapacity in many sectors and leveraged corporate balance sheets has also deterred investment. But, corporate confidence is building up and the India opportunity is significant. However, I expect the primary capital raising to primarily focus on de-leveraging over the next 12 months; corporate capital expenditure might not pick up in a big way.

What are the key talking points for investors at this juncture?

The coming general election is beginning to become an inflexion point, with the uncertainty giving prospective issuers pause for thought. Two or three months ahead of the general election, investors typically tend to remain on the sidelines. The price of oil is also an important factor, as it has an impact on inflation, the fiscal deficit and, ultimately, monetary policy. If these remain below $7580 (a barrel), the economy is likely to remain resilient.

Given the recent regulatory changes, are FIIs more comfortable with investing in other markets?

I would not say that. India’s GDP is roughly $2.5 trillion and expected to grow at seven-plus per cent per annum. There could be a number of reasons why FIIs might choose to not invest but the broader macroeconomic story is very much intact.