‘In­fra­struc­ture Will Con­tinue to Draw Most In­vest­ment’

The Economic Times - - Money -

The in­vest­ment cy­cle has started turn­ing with power trans­mis­sion, roads and re­new­able en­ergy sec­tors show­ing up, said Rakesh Singh, group head for in­vest­ment bank­ing, cap­i­tal and com­mod­ity mar­kets, HDFC Bank, which has leapfrogged to the sec­ond spot in the debt cap­i­tal mar­ket league ta­ble. In an in­ter­view with Saikat Das and Baiju Kalesh, he said that with bank rates fall­ing, the spread or gap be­tween loan and bond mar­kets has nar­rowed, but cor­po­rates will con­tinue to raise funds through a com­bi­na­tion of both serv­ing dif­fer­ent pur­poses. Edited excerpts:

How do you see the in­vest­ment cy­cle turn­ing around? In­vest­ments are largely hap­pen­ing in three sec­tors. Firstly, it is the trans­mis­sion sec­tor. Look at Pow­erGrid’s earn­ings and you will see the change. Pow­erGrid is award­ing a fair num­ber of con­tracts. Sec­ond is the roads sec­tor, both un­der hy­brid an­nu­ity model (HAM) and EPC model. On the road side, they are try­ing to speed up a lot of things. We are syn­di­cat­ing and par­tic­i­pat­ing in fi­nan­cial clo­sure of four HAM projects. We ex­pect ac­cel­er­a­tion in award of HAM projects next year. The third is cap­i­tal ex­pen­di­ture in re­new­able power — so­lar and wind. Sig­nif­i­cant capex is hap­pen­ing in this space. In­vest­ment will con­tinue to be largely in in­fra­struc­ture across the coun­try.

Which are the lag­gard sec­tors? The ce­ment sec­tor is also op­er­at­ing at 55-60% ca­pac­ity in the South and a lit­tle higher in other parts of In­dia. The steel sec­tor will take time to un­der­take any capex or ex­pan­sion. Brown­field projects are com­ing up in the sec­tor but no green­field projects yet. Capex is also needed in the of­fice space and ware­hous­ing sec­tor. Fur­ther, in­vest­ment in metal will be cal­cu­lated, not mas­sive. In­vest­ment in build­ing ma­te­ri­als will progress but in a mea­sured pace. We see more con­sol­i­da­tion in these two do­mains as weaker play­ers may sell and move on.


Will the HAM struc­ture see any change with ex­pand­ing road in­fra­struc­ture? Debt in HAM projects will not re­main in the cur­rent for­mat. It will re­main in loan for­mat dur­ing con­struc­tion, but post com­ple­tion, the whole HAM as­set port­fo­lio may ac­tu­ally move to In­vITs, as these cash flows are pre­dictable. As an In­vIT in­vestor, you could ex­pect 11% yield while bond in­vestors would get 8% re­turns.

With bank loan rates fall­ing, will the bond mar­ket re­main rel­e­vant? Rates are get­ting cut down in the loan mar­kets due to which the dif­fer­en­tial be­tween bonds and loans have also nar­rowed. In bonds, com­pa­nies fix rates for a longer pe­riod of time. In opt­ing for MCLR regime, there is a pos­si­bil­ity to ben­e­fit if rates go down. Even­tu­ally, you will see a mix of loans and bonds in all as­sets. A coun­try starved for long-term in­fra­struc­ture funds can­not ig­nore bond mar­kets. Top-rated cor­po­rates are al­ready in the com­mer­cial pa­per mar­ket, and CPs are pre­ferred over bor­row­ing from the bank mar­ket. The dif­fer­en­tial was fairly sig­nif­i­cant. Now, it has nar­rowed down.

What will trig­ger bank credit when cor­po­rate bonds are deep­en­ing? Cor­po­rates need more of work­ing cap­i­tal. The bond mar­ket is not a so­lu­tion for it. The bond mar­ket is a pre­ferred mode when you need funds to meet capex re­quire­ment or make an acquisition. The cor­po­rate bond mar- ket is be­gin­ning to like credit. When it comes to less than top-rated cat­e­gories, in­vestors are try­ing to delve deeper into credit be­fore in­vest­ing. More fund flows are com­ing to these seg­ments, ear­lier seen highly illiq­uid. We are ex­cited to see this and this is as a sig­nif­i­cant step in devel­op­ment of In­dia’s bond mar­kets.

Why are deals shift­ing to do­mes­tic banks from for­eign banks? For­eign banks want to de­vote their en­ergy on large-fee and mar­quee busi­nesses. As a re­sult, they are leav­ing large debt and eq­uity mar­ket for us to serve. They have a high fee thresh­old for deals. To­day in the In­dian con­text, we are de­liv­er­ing the ex­act qual­ity and ser­vice which for­eign banks used to de­liver. So, they are bound to lose as they go along.

So, what is the se­cret sauce? Our client in­ter­ac­tions are more in­ter­mit­tent and knowl­edge of their needs is bet­ter. We are able to serve the client quicker and of­fer value for money. We have a strong bal­ance sheet and the abil­ity to be with clients for a longer du­ra­tion. More­over, when you are closer to the ground, your un­der­stand­ing of risk is sharper, while it is time con­sum­ing for for­eign banks as they have to be in align­ment with their off­shore head­quar­ters. Ul­ti­mately, risk is lo­cal and un­der­stood bet­ter by lo­cal bankers.

HDFC Bank has climbed the lad­der in the debt cap­i­tal mar­kets. Will you be able to main­tain the sec­ond rank? We have cho­sen a cer­tain path. Our bank is one of the most re­spected brands to­day. We would like to as­so­ciate our­selves with is­suers of cer­tain pedi­gree and qual­ity. The brand is ex­tremely valu­able to us. That’s why you are see­ing us care­fully se­lect­ing IPOs where we want to as­so­ciate our­selves. We have to en­sure that we live up to the ex­pec­ta­tion of our bank’s stake­hold­ers, who want the bank to do qual­ity as­sign­ments.

What is hap­pen­ing on your M&A trans­ac­tion front? We are also run­ning seven M&A trans­ac­tions. We are cur­rently as­so­ci­ated with nine to 10 eq­uity trans­ac­tions now. We are do­ing Av­enue Su­per­mart, Shankara Build­pro, GR In­fra, NSE, AU Fi­nanciers. We just closed the rights is­sue of Ori­ent Pa­per.

Will you con­sider ar­rang­ing over­seas is­suances? Not in the near fu­ture.

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