No 2017-like IPO pipeline in second half this year: UBS India's Anuj Kapoor

Anuj Kapoor, MD & India Head, UBS Investment Banking
It is unlikely that this year’s equity fundraising tally will surpass that of last year. Anuj Kapoor, head of investment banking, UBS India tells Samie Modak that rising global and domestic uncertainties could weigh on equity capital raising in the near-term. Edited excerpts:

What are the kinds of themes that IPO investors are chasing at this point?

It is worth noting that the equity market rally this year has not been broad-based. In excess of 60 per cent BSE 500 stocks are in the red as compared to the beginning of the year. At the same time, it is primarily the top 6-7 stocks driving the rally for the Sensex. Investor interest is concentrated in established names and the 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 like to put a number to the equity fundraising that can take place in the remainder of the year?

Given market volatility, equity capital market (ECM) volumes are likely to be less than those last year. In 2017, there were approximately $11 billion of IPOs and $32 billion of total ECM volumes. I don’t think we will reach this kind of 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 have either been pulled 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 tend to stay on the sidelines. But, for the right kind of story and name, there will always be appetite.

The year 2017 was the best-ever year for equity fundraising. Do you think last year’s tally will be topped soon?

If the government maintains a pro-reform agenda, 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 raised about $2.3 billion recently. 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 participation in IPOs go down?

Investors are being selective. Over the last three months, FIIs have consistently withdrawn funds from emerging markets across the board. The outflows have slowed recently but they haven’t stopped. A broader theme of flight to safety is playing out. Emerging market 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, if not, more important than FIIs. What’s not so encouraging is that while MF flows remain strong they have tapered off from their peaks. In light of the state elections later this year and general elections next year, coupled with macroeconomic uncertainties such as the direction of rates and inflation, possible escalation in tension surrounding global trade, we can expect further volatility in the emerging markets.

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 remains muted.  Overcapacity in many sectors and leveraged corporate balance sheets have 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 deleveraging over the next 12 months as corporate capital expenditure may not pick up in a big way.

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

The forthcoming 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 elections investors, typically, tend to remain on the sidelines. The oil prices are also an important factor because it has an impact on inflation, the fiscal deficit and, ultimately, monetary policy.  If oil prices remain below $75-$80, the economy is likely to remain resilient. When oil starts trading north of $80, it will start impacting the rate of economic growth more adversely.

Given the recent regulatory changes, are FIIs more comfortable investing in other markets as compared to Indian companies?

I would not say that. India’s GDP is roughly $2.5 trillion and is expected to grow at 7 per cent plus per annum. So I don’t think investor interest has diminished. There can be a number of reasons why FIIs may choose to not invest but the broader macroeconomic story is very much intact. It is important for India's standing among international investors that the government continues its reformist agenda. Recent reforms may have had teething problems but most of them have had a positive investor impact.