Advise caution while investing in IPOs ahead: HSBC

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Advise caution while investing in IPOs ahead: HSBC

Investors must be cautious while putting in money into the various initial public offerings (IPOs) that are lined up in the stock markets, Tarun Kataria, Managing Director and Head of Global Banking and Markets - India, HSBC, said. IPOs like NHPC and Oil India would be successful though, he said.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Local investors not happy over Sterlite ADS issue Power rush: After IPOs, midcap cos up the ante ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: Two related questions. While the tech boom may have gone down but it had unlimited opportunities in terms of the kind of scale up we have seen with some of the companies. Power sounds more like the UK railroad boom which is you just build the railroads-it is a utility, it pays 14-15%. What should investors really expect out of power? Obviously we need it but there is one thing to be social about it and it is another thing to think about like shareholders because finally it is a regulated industry. It pays you 12-14% whatever annuity and that's pretty much it. What do you make out of it for investors, just from an investing view point?

A: I don't profess to be pro in the power business. But, I suspect, if you look at the return on equity (RoE) story of our companies and especially those that will come onstream in the next three to four years I think perhaps that's part of the driver story and I think I go back to this thing about be careful about the power hype and the infrastructure hype. So you sort of need to go back to basics - what do you expect the return on equity to be? What is their pricing capacity, debt equity ratios? Look at the management track record and then make the call. But I think it is really about RoE in power.

Q: Have investment bankers begun to be consulted on the various IPOs or even follow-on offers for several of the government divestment programmes and have you gone around trying to make a dipstick survey of the appetite for these NHPCs, Oil Indias, NMDCs and Kudremukh - have you'll already started testing the market?

A: Nobody is really started testing the market - at least we are on the Oil India IPOs and we haven't started testing the market, documents need to be refilled - board resolutions need to be passed etc. So I don't think we'll test the market probably until August or September. Our own view is these are again good companies. The story of productivity enhancements taking that capital investing it in oil producing blocks and frankly as the globe recovers - all these things become very good stories and as you know equity are about selling a good story. So while we haven't really been testing the market, we are comfortable that many of these things will be very successful.        

Q: What's your estimate for how much capital could flow in for some of the infrastructure in India because we are competing perhaps with China and some would say now with the US, I mean there is a lot of talk that US infrastructure spending could pick up very sharply and capital could move into those markets? Could you just comment on what is the availability of capital for this perhaps cash starved industry - how much can really come in?

A: It is tough to speculate how much will come in but clearly if you talk to the investor community whether it is in Singapore, Hong Kong, London or New York - I think they are clamoring for infrastructure assets if you look at the infrastructure funds that are in the process of being set up would suggest that there is a lot of interest for this asset class.

Now whether there is USD 12 or 50 billion is sort of unclear to me at the moment but I think the fact is clear that the need for capital is huge. The need for ensuring that things get delivered becomes key to the long-term sustainability of capital coming into this business. So yes once you get sort of your approvals done, once you get your capital - execution risk becomes extremely important. If you are not able to execute in a manner that sort of investors are comfortable then you are absolutely right - China where execution risk is infinitely lower than India or in certainly in the US I reckon as and when it happens will be lower that will be the differentiator for the long-term sustainability of the flow into infrastructure assets in India.

Q: Is there any sector appetite? Any sector that you think finds favour with investors at this point and what would it cost a AAA company to raise an ECB - a foreign loan today?

A: If the sectors are sort of reaching out to emerging India and not to belabor the point but Mahindra Holidays is a good example of that - anything that reaches out to that sector whether it is Hero Honda to just throw some names in the air, I think are generally in favour with investors and obviously we have spoken about infrastructure. ECBs I think if you look at ECB pricing 3 or 4 months ago would have been something in the order of 500 or 600 basis points. Today I reckon it would be in the order of 200-300 basis points assuming that these are not sort of very large tickets or highly levered transactions. So spreads have come in by about half but remember they were 50 to 100 18 months ago.