While the market has seen no Indian ECM issuance of size since the IPOs for Tech Mahindra and GMR Infrastructure in early August, Hong Kong-based bankers have resumed their frequent travels to the South Asian country over the past couple of months and pitching activity is again quite fierce. At the same time, a the number of issuers have filed (or in some cases re-filed) with the regulators for equity deals that could happen this year, depending on how quick the approval process is.
ôThe Indian primary market is looking up. Deals may have been pushed back, but the pipeline is quite robust. Over the next six months we are looking at a prolific calendar,ö says one India-based investment banker.
For now, the focus is on straight equity issuance, while the convertible market is expected to take a bit longer to gain momentum again.
ôA lot of CB investors were burnt pretty badly in May and there is still a big gap between where a deal can be executed and what the issuers are looking for,ö says one Hong Kong-based CB banker.
The lack of hedging opportunities for the equity portions of convertibles in India and the fact that the Indian market is much less liquid than its counterparts in North Asia ûmeaning it may take a lot longer to exit an investment that is turning sour û are also likely to keep investors on their toes, he adds.
Two equity deals that could make a real difference to the issuance volume, and potentially even push it above the $15.7 billion raised in 2005, are Cairn Energy India, which made a preliminary filing for an up to $2 billion IPO at the end of last week, and another sponsored ADR by IT consulting firm Infosys Technology, which is widely talked about but hasnÆt yet been mandated.
Depending on how many shareholders decide to sell their locally-listed shares as part of that offering, the Infosys deal could total as much as $1.5 billion. Infosys is known for moving quite quickly once it decides to do a deal, but the company hasnÆt yet sent out any requests for proposals. Meanwhile, the timing of the Cairn IPO, which will be led by ABN AMRO Rothschild, DSP Merrill Lynch and JM Morgan Stanley, still depends very much on how quickly the Securities and Exchange Board of India (SEBI) comes back with comments. And that could mean that both these deals will be pushed into next year û a fate also shared by property developer DLF Universal, which has seen its IPO postponed several times after it filed a draft prospectus in early May.
After minority shareholders kicked up a fuss about DLFÆs delisting from the Delhi Stock Exchange in 2002, the company finally withdrew the draft documents for what was initially expected to be IndiaÆs largest ever IPO (at about $3 billion) with the aim of updating them. The developer, which is being brought to market by joint bookrunners Kotak Mahindra Capital, DSP Merrill Lynch, Citigroup, Enam Financial Consultants, ICICI Securities, JM Morgan Stanley and UBS, is expected to re-file over the next few months.
What is likely to hit the market in the short term are a bunch of mid-sized equity offerings, which have been able to react a bit quicker to the improvement in both sentiment and confidence.
Remarkably for a market that lost 30% of its value in four weeks during the May downturn, India is currently up 36% on the year, making it the third best performing market in Asia after Vietnam and China. The Bombay Sensex index broke its previous record high last Friday (October 13), finished above 12,900 points for the first time the following Monday and came within six points of the 13,000 mark on October 17, before embarking on a slide that saw it close at 12,723 points yesterday (October 19).
However, with a three-week lag between when the price range for an IPO has to be filed with the regulators and the actual launch of the offering, many issuers û especially the larger ones û have been holding off waiting for the market volatility to ease and for share prices to stabilise, bankers say. Another reason for the slower return of issuance in the Indian market compared with other geographies, is the fact that the regulatory approval for an offering is only valid for three months. This has forced many of the issuers which originally planned to list in May or June to re-file their draft listing documents, adding additional time to the preparations.
Among those first in line, Sobha Developers is expected to bring an IPO of about $100 million through Enam and Kotak Mahindra, while fellow real estate company Parsvnath Developers is looking at a $150 million to $200 million issue with the help of DSP Merrill Lynch, Enam and JM Morgan Stanley. Lanko Power is also in the process of finalising a $200 million primary share offering.
While on the small side, the $30 million to $40 million IPO by IndiaÆs largest online job site, Info Edge, may also attract some interest among international investors, given that it will be the countryÆs first internet company to go public. Marketing of the deal, which is led by ICICI Securities and Citibank Global Markets, will start at the end of October.
ôPossibly another $600 million to $700 million or so could get done, so we should reach $12 billion, but I think the expectation in May was that full-year issuance volume could be $15 billion plus,ö says one banker. ôThe good thing is that there have been no privatisations this year, unlike in 2004 when we saw $10 billion of issuance and there were a lot of government sell-downs, including ONGC.ö
The government sold $2.3 billion worth of shares in Oil and Natural Gas in March 2004 in what still ranks as IndiaÆs largest IPO. That same year it also sold shares in National Thermal Power and Gas Authority of India. This year, the only possible part-privatisation with a chance of getting squeezed in before the new year is Power Finance Corp. However, the company, which lends money to finance power sector projects, is more likely to come early in the new year, bankers believe.
Because of a lack of consensus between the coalition partners, the government has decided not to participate in the Power Finance sale meaning the IPO will be made up of new shares only. The rift within the government has not only delayed the launch of the deal, but will likely also reduce the size to $150 million to $200 million from an initial target of about $300 million.
While investors have seemingly been quite happy to drive the secondary market to new highs, some bankers believe they will remain somewhat cautious towards IPOs. One reason is that the mid-cap segment of the market has been lagging the large caps in helping to drive the recover. Share prices of mid-caps are not quite back to their May levels.
Since most IPOs do come from the mid-cap segment of the market, this means issuers cannot be too greedy with regard to valuations on the first few deals, or they will run the risk of seeing the market stall before it manages to regain sufficient momentum, the bankers warn. ôI think many issuers are waiting to see some other transactions happen before they make the final call (whether to go ahead). So what we are seeing right now is a broad wait and watch period,ö says a banker with an Indian investment bank.
This is especially true when it comes to convertibles. After leading the country league tables by a mile in the first four months of the year, CB issuance out of India has ground to a virtual standstill with only one publicly marketed deal above $100 million done since mid-May and none at all since mid-July.
India is by no means the only market to have experienced a CB drought in the wake of the May correction, although it may have lasted a bit longer than elsewhere because of the aggressive pricings that were being applied to more and more deals just before the downturn, meaning many bankers actually welcomed the chance for the market to cool off a bit.
Data complied by Dealogic show that CB issuance volumes in Asia ex-Japan ranged between $1.28 billion and $1.78 billion a month in the first part of the year, before collapsing to $514 million in June. In July it was back up at $1 billion, but then eased again to $839 million in August.
Encouragingly though, while India remained off the chart, issuance came back with a bang in other jurisdictions in September with $2.13 billion raised. And as share prices return to their pre-correction levels and conversion premiums in the secondary market fall back to about the 30% to 50% bracket (some CBs issued shortly before the correction saw premiums soar as high as 80%, scaring off even the most bullish of punters) Indian issuers too are expected to return to the primary market.
One CB banker says he sees at least a couple of potential Indian issues in the $100 million to $250 million range hitting the market within the next four weeks and as long as those go well and are reasonably priced, more are likely to follow. In the long run, nobody doubts the Indian market will continue to churn out large numbers of equity deals every year, including CBs.
As of mid-October, the ECM league table for India is topped by Citigroup with a market share of 16.7% and 21 completed deals. It is followed by Barclays Capital with a 10.7% market share and seven deals, and Deutsche Bank which has 10% of the market split on 11 deals.
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