‘InvITs, REITs issuance to increase as investors look for steady income’
Mergers and acquisitions (M&A) activity fell 68 percent to $10.8 billion in the March quarter and fell to a seven-year low. Initial public offerings (IPOs) have also slowed dramatically. On the other hand, stock markets are trading near all-time highs on hopes that India will get rid of global turmoil. Salil Betali, Joint Managing Director, Access Capital, shares his views on various aspects of the market. Excerpts:
How do you see the current financial IPO pipeline?
The market has already seen a number of quality IPOs such as Mankind and Nexus REIT, which had a strong opening when they listed. Domestic and foreign investors have been very active in IPOs, numerous secondary market offerings and OFS transactions. The current IPO pipeline is leaning towards small to medium sized deals (Rs. 500-2000 crores) some of which will hit the markets in the first half of this financial year. If IPOs continue to do well, we can expect some larger issuances towards the end of this year. After all-time high levels of fundraising in FY22, the IPO market experienced a decline of more than 60 percent in FY23, due to the poor performance of some listings and significant risk aversion on the part of foreign investors. Investor sentiment has certainly changed for the better in these public finances, but we do expect them to be very aware and cautious in their investment decisions. Only those companies of high quality and reasonable prices can expect acceptance in the IPO market.
Why do some companies sit on the fence in the IPO market?
There are about 50 issuers that have been approved by SEBI, but they have not yet launched an IPO. Roughly 70 percent of those will get their approval in 2022. In many of these cases, companies and bankers had tried to drive up demand for IPOs, but might have run into a price mismatch or generated insufficient demand. With a more positive IPO environment, we expect some companies to test investor interest again, including price revisions in some cases. Normally, once a balance of pricing and sufficient demand has been established, it will direct the issuer bankers to proceed with the listing. Companies assess appropriate market conditions for the launch as well as rebalance price expectations to reflect investor sentiment. Again, we expect investors to be selective and focus on quality and attractively priced exporters.
How do you see the current secondary market valuation?
The markets are trading near all-time highs. We see significant variance in the assessments of leaders versus players with low market share across segments. There is a clear bias towards quality companies, with proven business models, strong governance standards and a proven track record over several quarters (if not years). Ratings of the leaders of this sector are still high, yet investor preferences still center around these leaders.
What sectors do you focus on?
We have built our investment banking franchise on the back of strong sector practices, along with a broad product basket across ECM, Mergers & Acquisitions, Private Equity and Structured Finance solutions. Over the past three years, we’ve had strong market share across specialty chemicals, automotive and ancillary services, real estate, REITs (Real Estate Investment Funds) and InvITs (Infrastructure Investment Funds). We see a lot of opportunity in Enterprise Tech, as we’ve already worked with players like Route Mobile, MapmyIndia and Latent View. We also hope to build on our consumer franchise, having worked on Metro, Manyavar, Medplus, Bikaji and others.
How do you see mergers and acquisitions in the current fiscal year?
Mergers and acquisitions activity in India is expected to remain high. We’re seeing a number of Indian entrepreneurs build businesses and eventually generate income. Private equity firms have emerged as notable buyers, many of them bypassing the traditional focus of minority growth capital, to take positions of total control. They actively buy into growing companies, help them expand rapidly, and eventually sell them. At Axis Capital, we have built a strong financial sponsor (private equity) practice, having established relationships with most of the major private equity investors in the country.
Do you see more divestment or strategic sell-offs by the government this year?
At Access Capital, we haven’t been working on a strategic sale to the government recently. But we have been actively involved in divestment activities linked to the capital market including Coal India, LIC, Mazagon Dock and IRCTC. InvITs is another emerging asset monetization mechanism, with the government already having good initial success with InvITs Iisted by Powergrid and NHAI. We expect the government to continue using the capital markets route for divestment.
Do you expect more invitees to hit the market this year?
Yes, we expect good growth in the InvITs and REITs market in India. We have the largest market share in InvITs and REITs in India, spread across multiple InvITs (in roads, transport, renewables) and REITs (shopping malls and retail). We have noted strong interest from investors, including sovereign wealth funds, family offices, AIFs (Alternative Investment Funds), and institutions, who are looking for stable and predictable cash-generating assets in an uncertain global market.
How do you see foreign inflows in light of the global interest rate hike?
The developed economies, led by the United States, have already gone through a sharp upward movement in interest rates, which may not be the case in the future. While the western world faces challenges to economic growth, the Indian economy remains one of the most attractive markets for global capital. Sovereign funds, fisheries companies continue to find excellent opportunities in both stable and well-built cash-generating assets (through the REIT/InvIT route) and in high-growth companies through listed public stocks in sectors such as manufacturing, defence, chemicals, consumer, etc. Therefore, we expect foreign institutional capital to remain positively biased towards India.