Despite the recovery in broader equity markets, excitement in the primary market continues to remain muted with not too many initial public offerings (IPOs) coming through.
But V Jayasankar, senior executive director and head of equity capital markets, Kotak Investment Banking, said that he expects the IPO pipeline to firm up going forward.
“We expect IPOs worth around Rs 10,000-15,000 crore coming through in FY16,” he told CNBC-TV18 in an interview. He added that he expects overall fund-raising including secondary issues to witness total fund raising of Rs 50,000 crore next fiscal.
Two of Kotak’s own recent issues, Ortel Communications and Adlabs, too witnessed moderate responses with both being subscribed a little over time their sizes. But Jayasankar said both issues were high-quality with long-term investors subscribing majorly.
Below is the transcript of the interview on CNBC-TV18.
Sumaira: What is it that is ailing the primary market? Have the recent issue individually not been well or is there just not enough appetite for initial public offerings (IPOs)?
A: Both Adlabs Entertainment and Ortel Communications transactions got completed successfully. We had a good diversified base of institutional investors comprising the mutual funds, insurance companies and foreign institutional investors (FIIs). So what we feel enthusiastic is a fact that there is a good quality book of institutional demand in both these IPOs and our view and our conviction is that both these companies will go well in the short and medium-term.
As far as primary market is concerned, there is a fairly good pipeline that has built-up as the entire process of preparing the company, preparing the prospectus, filing, waiting for the observations to come from Sebi is a fairly long drawn process. Therefore, as a result what you notice is that the pipeline is slowly coming to the market, seeing about three or four issuances in March and this would gradually keep improving or you will see the same momentum going forward.
What we hear is that companies planning to raise about Rs 25,000 crore worth of IPOs, not all of it will get done in FY16, some of it will overflow into FY17 but it will be fair to say at this time to say about Rs 10,000 crore to 15,000 crore of IPO issuances will happen in the next fiscal.
Reema: We have list of Inox Wind, MEP Infrastructure, Power Mech Projects and PNC Infratech. Do you think all of these will be successful? We could raise about Rs 2,000-2,500 crore via IPO in the last ten days of March?
A: Let me take it in two parts. In first part let me deal with the observation about Ortel and Adlabs. I would like to emphasize that all the investors who have come in both these issuances particularly the institutional investor side, are mainly long-term investors, anywhere between 80-90 percent of the book is covered by long only investors, so that gives us a lot of conviction that this is a good quality book.
What we do not have or momentum players would typically come in and while they will increase the level of subscription, probably a lot more investors will flip near term for listing gain. So that’s what we feel pretty enthusiastic about both these transactions that while there maybe subscribed between 1 and 1.2 times on the institutional side, these comprise of good quality of long only investors.
Coming to the other issuances that will hit the market over next few months, I would say that there is a fairly strong appetite. The reason I say this is because the mutual fund industry has seen an inflow of about USD 10 billion in the last one year or ever since the Modi government has come to power.
Similarly the FII flows have been reasonably strong of about USD 17 billion in the last calendar year. If you take the kind of money that is coming in and if you look at the valuation struggle that investors are dealing with, the only way the so-called valuation issue can somewhat be addresses if there is fresh paper coming into the market and we see IPO as one particular conduit for investors to play India story.
However, for many of the investors who are pumping money into India, we believe that they will start looking at IPO, we believe that there will be a strong appetite for QIPs and this will address the asset bubble issue, valuation issue that you very often hear secondary market player say that valuations are stretched in India.
Sumaira: The other side of the coin which is the government divestment – for FY16 the target is a shade under Rs 70,000 crore, which is the highest ever. Would there be appetite for that as well?
A: Certainly yes. Ultimately the government will make the decision when they would like to time these divestments. If you look at the Coal India transaction, it is highly successful transaction because the government activated the entire process in a matter of two days. I do not think anyone in the market knew about it. They did end up raising between Rs 22,000 crore-23,000 crore.
There is a fairly strong response from the institutional side even retail participants enthusiastically bring in about Rs 2,000 crore. Therefore, for high quality companies like Coal India, Oil and Natural Gas Corporation (ONGC), Oil India and others depending upon the companies that government is targeting, there is certainly enough appetite in the Indian market.
Reema: Can you give us a sense of what the qualified institutional placement (QIP) pipeline is right now and how much do you think the equity transactions could totally raise – public sector undertaking (PSUs) as well the private sector companies could raise in FY16 via secondary market transactions?
A: Last year the amount of money raised through QIPs and follow-on was about Rs 27,000 crore, referring to the current fiscal year. In our estimate this number can move between Rs 50,000 crore and Rs 60,000 crore and the way I look at the break up is probably the public sector banks will do about Rs 25,000 crore and private sector will do about Rs 35000 crore and as a result you therefore may have a very robust QIP market in the next fiscal year.