‘Cen­tre has be­come smart in how it con­ducts dis­in­vest­ment’


In­dian cap­i­tal markets are at an in­flec­tion point, says S. Ramesh, man­ag­ing di­rec­tor and chief ex­ec­u­tive at Ko­tak In­vest­ment Banking. He ex­pects to see Rs 1 tril­lion of fund rais­ing in the next 12 months. In an in­ter­view, Ramesh says the In­dian mar­ket is likely to wit­ness a record fund rais­ing spree with the banking, fi­nan­cial ser­vices and in­sur­ance (BFSI) space dom­i­nat­ing. Ramesh be­lieves 5-7% of in­cre­men­tal do­mes­tic money will flow into in­sur­ance ini­tial pub­lic of­fer­ings. He also says that do­mes­tic flows are un­likely to choke sec­ondary mar­ket liq­uid­ity. Edited ex­cerpts:

What is your view on the In­dian cap­i­tal markets? I be­lieve that In­dian cap­i­tal markets have been at an in­flec­tion point from fis­cal 2015. So fis­cal 2015 to date, from what I saw of the tally of the num­bers, In­dia Inc, in var­i­ous forms has raised close to $36 bil­lion and close to $60 bil­lion have been the in­flows from for­eign in­sti­tu­tional in­vestors (FII) and mu­tual funds. So we are in for in­ter­est­ing times and I just want to say that it may not be 18 months, it may be in 12 months that you will see Rs100,000 crore be­ing raised in In­dia.

There is a lot of ar­gu­ment that there is a huge gush of do­mes­tic liq­uid­ity which is help­ing this sec­ondary mar­ket to rally. From your per­spec­tive, with this sup­ply of pa­per com­ing in, will this choke the sec­ondary mar­ket liq­uid­ity or do you think this will en­hance ex­pand­ing the bull mar­ket?

The an­swer is clearly the lat­ter. If you look at just the mu­tual fund col­lec­tion, the net mu­tual fund col­lec­tion which we are wit­ness­ing in re­cent months, it is Rs6,000 crore a month and there are two other things I want to quickly add. Out of the Rs100,000 crore ex­pected to hit the mar­ket, a lot of pa­per is out of in­sur­ance, banking and the fi­nan­cial ser­vices.

In­sur­ance is a space where we have not seen much ini­tial pub­lic of­fer­ing or any form of pa­per come to the mar­ket and mu­tual funds are ac­tu­ally won­der­ing where they should de­ploy this col­lec­tion. And it will be a great fit to what they want to do. Close to 33% of the do­mes­tic and in­ter­na­tional money is in the fi­nan­cial ser­vices and my judge­ment is 5-7% out of this will now in­cre­men­tally move to the in­sur­ance sec­tor. So it is ex­actly what the doc­tor or­dered.

So from a val­u­a­tion point of view, do you think that is a sec­tor which is poised for growth which would mean that there is a lot of de­mand for in­sur­ance pa­per over the next six months?

If you look at the pro­file of the mar­ket to­day, both sec­ondary and pri­mary, there is no pres­ence of in­fra­struc­ture in real es­tate. So these are high growth com­pa­nies with high re­turn on eq­uity (ROE). My def­i­ni­tion of high ROE is in the high teens, with for­mi­da­ble growth in great gov­er­nance. So val­u­a­tions tend to be a little high, but I think they de­serve these val­u­a­tions. What do you make of the over­all banking, fi­nan­cial ser­vices and in­sur­ance space? Do you think there is a kind of a bub­ble form­ing up in BFSI and one needs to be a little care­ful now?

Not at all. If you look at the BFSI space, there is a lot of va­ri­ety that is com­ing into this. The rea­son I am ask­ing is AU Small Fi­nance Bank at eight times, RBL Bank at six times, is there a risk of val­u­a­tion in that space?

The an­swer is that with many of these com­pa­nies in the BFSI space, I think val­u­a­tions are go­ing to set a new nor­mal. So, I do not think the val­u­a­tions bub­ble is of any con­cern and in­vestors are look­ing for­ward to in­vest­ing in these com­pa­nies be­cause of their his­tor­i­cal high Roes and great growth.

Then the big ques­tion is what this means for the PSU banks. You think there is a ray of hope for the PSU banks?

The PSU banks, we re­cently did a qual­i­fied in­sti­tu­tional place­ment for State Bank of In­dia (SBI) which was the largest Qual­i­fied In­sti­tu­tion Place­ment (QIP) in the mar­ket. It was very well re­ceived. Se­condly, in­vestors have started to take note of some res­o­lu­tion around the non-per­form­ing loans (NPL) and talk around the merger, so they will be se­lec­tive on the PSU banks. But I want to go back to the BFSI space. In ad­di­tion to his­tor­i­cal non-banking fi­nan­cial com­pa­nies (NBFC) and banks, now there are more pri­vate sec­tor banks, but in­ter­est­ingly, in­sur­ance IPOS and now we are also go­ing to see ex­changes com­ing, mu­tual funds com­ing. So there is a lot of va­ri­ety to choose for these in­vestors. What is your view on the 12 cases which are in Na­tional Com­pany Law Tri­bunal (NCLT)?

I think there is al­ready one that has re­ally come to con­clu­sion or very close to con­clu­sion. In any of these new the­matic sig­nif­i­cant struc­tural stuff that you do, it will never be wrin­kle free, but I am op­ti­mistic that you will see a few cases over time, which are suc­cess­ful and in a way, that will re­flect on the stock prices of these banks and in­sti­tu­tions. So I am def­i­nitely hope­ful. The one big trend that I saw per­son­ally in that IPO mar­ket over the last 12 months was that a lot of the IPOS which hit the mar­ket were ex­its for the pri­vate eq­uity (PE) guys rather than fresh cap­i­tal for the busi­nesses. Is that go­ing to be a change in terms of IPO pro­file of com­pa­nies be­cause a lot of in­sur­ance com­pa­nies are go­ing to come?

The as­pect that you re­ferred to now does not ap­ply to in­sur­ance com­pa­nies, but what you talked about, these are com­pa­nies from the non-in­fra, non­real es­tate which got PE fund­ing 4-5 years back and all of these are now due and ripe for exit. But, the three char­ac­ter­is­tics I would like to re­peat, in most of these com­pa­nies, if not all, many of these com­pa­nies are close to a bil­lion dol­lar mar­ket cap. Se­condly, their Roes are very good which is a key barom­e­ter in­vestors look at. Thirdly, they are phe­nom­e­nally high growth firms with great gov­er­nance and young pro­mot­ers. This is the trend of the IPO mar­ket to­day—this trend will con­tinue.

Com­ing to the di­vest­ment agenda now. In fact, we are in the mid­dle of NTPC’S of­fer for sale (OFS) of 5%. You ex­pected al­most 10% to be sold over a pe­riod of time in NTPC and there are a few oth­ers as well lined up. Good tim­ing by gov­ern­ment in terms of sell­ing out se­lec­tively into the open mar­ket.

I would like to give you a trendy an­swer on dis­in­vest­ment. I am op­ti­mistic that the gov­ern­ment dis­in­vest­ment pro­gramme will broadly meet what its ob­jec­tives are.

But as a per­son who has been ob­serv­ing this for a num­ber of years, what I do see is that the gov­ern­ment has be­come adept and smart in how they con­duct their dis­in­vest­ment. Ear­lier it was re­stricted to a few com­pa­nies, but to­day that bas­ket has widened.


Ko­tak In­vest­ment Banking man­ag­ing di­rec­tor and chief ex­ec­u­tive S. Ramesh.

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