Strong response to QIP; NTPC may rise 30%: Axis Cap

Manish Chokhani, MD and CEO, Axis Capital and Dharmesh Mehta, MD-institutional equities, Axis Capital explain in a discussion on  CNBC-TV18 that there been a very strong response to the Axis Bank QIP whose price was set at Rs 1,390 per share. The QIP witnessed participation from most of the major long-only investors and pension funds.

The panelists added that this was a clear indication that investors continued to prefer private-sector banks over PSU banks. Axis Capital was at an early stage of the recovery in capex  cycle at the moment  which was aided by improvement in the company's balance- sheet.
The senior executives also highlighted that the increased interest in the real estate sector indicated a risk-on mood in the market and pointed out that there has a been decent inflows of long-only funds and not just ETFs.
Revealing that the FII-fund inflow has been quite diverse so far, the analysts expect a strong response to the NTPC issue and a 30-percent upside in NTPC from current levels. Below is an edited transcript of the interview.

Q: Can you give us some details on how Axis Bank's qualified institutional placement (QIP) issue has been received and what are the latest numbers looking like on subscription? Chokhani: The book has opened and closed, but the issue of course is still on, because we still have to go through the process of calling the applications and making the allotments. It is just extraordinary what has come out and we are enthused with the response which has come and the quality of investors which have shown up, it is just like a dream issuance.

Last September when HSBC sold out of the bank, the stock was somewhere around Rs 940 when we started intensive work with investors, because we felt it was not distributed properly at that time. From there, we currently have a 50 percent move and with this move to make people believe what the bank is up to and how the rerating process of the bank is undergoing and yet having left money on the table for investors is just been a dream transaction and is one of the landmark transactions. Also Read: RBI move pushes Nifty towards 6100, Axis up 4.1% Q: The final numbers are not yet in, but is it heading towards three times subscription on a fairly significant offering size and can you give us some detail on the profile of investors that you were alluding to? Chokhani: I would leave that to Dharmesh, but the responses across the world – you can imagine if last year India got USD 28 billion of inflow. In January alone we got USD 3 billion of inflow and presumably our deal will add a billion to that on February 1. There are pension funds from overseas, they are the best quality long names that you can find anywhere in any book it is only when this shareholding list will come out in the next disclosure that the bank will make the exchanges.
You will find it vindicated that what we have managed to achieve has changed the character and composition of the quality of investors in the bank. We are very hopeful on Axis Capital which is 3 percent of the bank and is a subsidiary that will add more than 100 percent value to the bank and we are extremely pleased to have done that.

Q: Did you have an upsize option on the QIP? Now, do you feel you should have? Chokhani: No, I had taken permission for a larger issuance, but they were clear that they did not want to dilute more than a certain percentage. It was always launched as Rs 5,500 crore and net of the preferential which is being made to Life Insurance Corporation (LIC), General Insurance Corporation of India (GIC) and other insurance companies. The net offer available to investors to come in was USD 877 million and that is subscribed. I cannot give you the numbers, but it is significantly high. Much higher than what you are saying.
_PAGEBREAK_ Q: Could you just confirm the issue price and breakup the point that Manish was making in terms of what kind of long-only interest have you seen for the issue? Mehta: The issue price was announced at Rs 1,390. We stuck to that point and instead of going to a range, we said that let us go and run price which investors will be very happy about. On the quality of investor, we have all types of investors specially the long-only from different regions. We have pension funds. Unfortunately, we could accommodate only 49 names as per the guidelines, so we had to leave a lot of investors out of the book. But the process is still on and will be restricted to only 49 accounts. Q: What did you hear from investors – is it still a private banking versus public sector banking story where the valuation gap continues to be very large or is it still very bank-specific, considering the appetite that is coming in from the global guys? Mehta: The preference is over private banks versus the public sector banks till the time people feel that Indian economy is back on track. Even there, the private sector banks will benefit first. So, there is a large preference of private sector banks and people are much more confident on India as of now, you can see after a back of inflow of almost USD 28 billion last year. Currently, we are almost at USD 3 billion plus and an additional two or three billion dollars that we added. The confidence on Indian economy is back and hence the banking sector is a big preference in the private sector over public sector banks.

Q: Going forward, what do you expect to see in terms of how these stocks are valued? Even in the private sector space it is a range of valuations between HDFC Bank, ICICI Bank and Axis Bank. In your dialogue with some other investors, how do they ascribe valuations to a set of private sector banks which are not announcing results and are very disparate, but valuations are all over the place? Chokhani: Most banks tend to make a 15-20 percent return on equity (ROE) and somewhere between 1.5-2 percent on the return on assets (ROA). However, what people have been valuing at different points is embedded volatility in the stocks. The benchmark stock of course has been Housing Development Finance Corporation (HDFC) for giving consistent performance with the 20 percent sort of ROE and people love that.
The banks which have been valued much lower despite delivering similar ROEs have been due to volatility appearing in their performance. While one will take an aggregate five year period, three year period or a ten year period the number is going to stack up the same and therefore these valuations converge. That story is going on in a lot of private banks that people think that over time these can compound roughly 20 percent which is their embedded ROE. If that leads you down to your PE multiple and also your price-to-book, with time, you will start seeing convergence here as well.
If you think of the turn which has happened in India from September when the Finance Minister took over, it has been very dramatic. The first phase of that when you get the sentiment back and the liquidity back is when you get the economy in a way recapitalise and then that starts leading to capacity creation and the investment cycle getting kick-started. So, while Dharmesh alluded to the inflows last year, in December alone we did three largest transactions.
National Mineral Development Corporation (NMDC) came out with Rs 6,000 crore odd and was lapped up as well and we are happy that we were able to do very good marketing story there as well as the government listened on pricing and did a fantastic job of leaving money on the table there. We were also part of the Syndicate and Bharti Infratel's Rs 4,000 crore odd issue and then Dharmesh and his team successfully did Rs 1,500 crore sell down of Reliance Power.
If you consider December alone, there was almost Rs 12,000 crore of issuance which came to the market and yet the market is at its new highs. We have just placed about Rs 5,500 crore and after that the stock is Rs 50-60 up already from where it was priced. It is showing that there is appetite to come in India, to give money over here, so that the whole economy and the investment cycle revives.
We will not see this maybe for the next six months also that investment is going on the ground, but as balance sheets change the opportunities for companies will manifest themselves. So I am hopeful on that front and it is in this context that the market over the last 12-15 months had become very polarized between what one thought were the defensives and the fast moving consumer goods (FMCGs). The people who were suffering and the FMCG valuations are coming down and the other side of the market trending up.
As you were talking to one of the largest real estate companies and you are seeing appetite over there, which until 12 months ago people would did not even spoke of touching that sector. All these things that we sense, when we go out and one can start building investors and issuers and to get these to converge, so I expect to see a lot more of this happening in the next three to six months.
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Q: You have been on roadshows. What are you picking up about liquidity because the criticism of the quality of liquidity right now is that it is coming into the region, it is not so India-specific and is not so much about the performance of India but just chasing performance across the region? Is individual company like yours getting quality capital, but not so much for the market itself? Mehta: I don't think there is any clear direction on what kind of money is coming into India, but you are seeing a lot of long-only type of money coming in rather than only exchange-traded fund (ETFs) and the liquidity is very strong. People want good deals out of India or good ways to invest in India.
Often people complain that India itself has made a difficult destination to invest in. So deals like ours or maybe when you see the government deals coming at a good price, you will see record subscription to those deals as well. I don’t think there is a problem of liquidity at all, especially for India, but we now need to get that money back to India.

Q: Are you feeling a lot more bullish about the market and thinking that the big turn is coming between defensives and high-beta? Chokhani: It is happening. You are absolutely right and I am seeing that in the way people are approaching some of these companies. So, while the teams are out on road shows and I have been out over the last three-four months as well, there is no area of the market which is a taboo to discuss for which I could not have said the same thing 12 months ago. I alluded to the markets are open for real estate companies. They opened last month itself for few of the power companies. Government disinvestment was seen as a bad word.
NMDC was a spectacular success as a deal. It did not have to get placed with government institutions as people believe and fantastic book even on NMDC and the way it has performed after the Offer For Sale (OFS) over there as well. So there is money and while it is not one segment which is coming, I do not think you can see it as only region specific money or Exchange-Traded Fund (ETF) money or India specific money.
The fact is there is money for India. We will become the fifth, sixth largest economy in the world. We cannot be sitting at USD 1.5 trillion market cap. We will inevitably get higher. I still maintain the real top of the bull market is 2016 and 2013 is still very early to discuss that sort of raging bull market. We still have a lot of things to fix in the country. So these are all good indications. We have begun the journey well, but by no means we should get carried away and say it is going to be a repeat of 2003-2007 cycle. But surely the journey is well underway and I am very hopeful about the next three years.

Q: You have concluded a few successful deals in the last one month. Do you think the upcoming issues like National Thermal Power Corporation (NTPC), Oil India will also see strong appetite from investors? Chokhani: Yes, for NTPC we are not on the syndicate, but it is an extremely strong issue. You will get fantastic response on that. The pricing is very good. We are going to see 20-30 percent upside on that given where the stock is today. I expect that one will go very well and we are not part of the syndicate and I am still saying that. So, it is a good issue coming.