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India’s capital markets have started the year on a high note. Despite worries about the weather and high oil prices, the economy is expected to have grown by 6.9% in the year ending this month. Small but significant steps have been taken towards economic reform in recent months.
After a long negotiation with its allies on the left, the United Front government finally raised the foreign direct investment limit in telecoms companies to 74% from 49% and recently opened up real estate to FDI. Rules restricting investment by Indian pension funds and banks in equity have been eased.
Standard & Poor’s upgraded India’s foreign currency rating in early February to BB+, one notch below investment grade, after a record year for Indian foreign currency debt offerings in 2004 when Indian companies issued foreign currency bonds, convertibles and raised syndicated loans worth over $7 billion. The latest to join them is Tata Power, which launched a five-year $200 million convertible bond on February 9 priced at a yield to maturity of 3.88% and a conversion premium of 50% to the closing price of the shares on February 8.
Foreign portfolio equity investors continue to be bullish. They invested over $1.5 billion in Indian stocks in the first six weeks this year, after investing $8 billion in the whole of 2004. Ayaz Ebrahim, CIO for HSBC Asset Management, Asia Pacific, says the offshore India equity fund he manages grew to its current size of $ 2.7 billion from $200 million in just two years. Even if the US dollar were to strengthen from current levels, dampening enthusiasm for Asian equity, India would not be affected as much as Korea, Taiwan or Hong Kong, he adds. “We do not expect the US dollar to collapse, we think it will stay soft and that should be good for Indian exports. The beauty about India is that it has a sizable domestic economy and it has shown sustained growth of around 6% each year,” he points out.
Another asset manager with a foreign bank points to a growing interest in India from Japanese investors, adding that in recent months HSBC, JPMorgan, Fidelity, Prudential and Deutsche have launched offshore Japanese funds that have invested close to a billion dollars in Indian equity.
Several new hedge funds are looking to invest in India. There are 12 India-focused funds, and another 30 with major allocations to India, according to EurekaHedge. Funds mandated to invest in India were among the top performers last year. Together, hedge funds have invested an estimated $1.5 billion, according to one analyst. Local investors appear to be warming to equity investments too after the tax on capital gains was cut last year. An open-ended mutual fund launched by Franklin Templeton collected close to $500 million in mid-February.
A strong takeoff
Equity issuance in the primary market remains strong. An IPO by Jet Air, India’s largest private domestic airline and the first airline company to be listed in India, opened to strong subscription on February 19 and could raise Rs19 billion ($445 million), or 20% of its diluted equity capital. An IPO by entertainment company UTV opened on February 21, expecting to raise Rs8.9 billion, around 34% of its diluted capital, while retailer Shoppers Stop has filed an offer document with the regulator. Hutchison’s Indian mobile operations and Reliance Infocomm are other possible issuers this year.
With the strong pick-up in credit, bankers expect state banks to raise close to $2 billion in equity this year. An IPO by Punjab National Bank, a state bank, is expected to be in the market in early March with a $680 million offering. Allahabad Bank, Oriental Bank of Commerce, Bank of India and possibly State Bank of India are getting ready to tap the market with their offerings.
In the PNB offering the government will sell its shares indirectly because current laws bar the sale of government shares in state banks without parliamentary approval. PNB will therefore return capital to the government after the offering that will reduce the latter’s stake from 80% to 57%.
After a record year in 2004 in which there were billion-dollar offerings from public sector companies such as Oil and Natural Gas and National Thermal Power, the sale of government shares will kick off after the annual budget is announced on February 28. Previously announced sales expected this year include Bharat Heavy Electrical and Maruti, the car manufacturer sold to Suzuki.
Cross-border acquisition got off with a bang this year when Holcim, the world’s second-largest cement maker, announced in January a $800 million plan to enter the Indian market, fuelling a frenzy in cement stocks. As a part of that plan, Holcim and Gujarat Ambuja, a local cement producer, will bid to acquire control of Associated Cement, the second-largest Indian cement producer. They will make an unconditional fixed price tender offer to buy 37% of ACC’s shares. The price of ACC’s shares has shot up above the offer price and analysts speculate that if Holcim does not revise its price, not enough shares will be tendered to give it majority control. It could then opt for the “creeping acquisition” route under India’s takeover rules whereby it can buy 5% in the open market every year. DSP Merrill Lunch advised Holcim, while Kotak Mahindra Investment advised Gujarat Ambuja, the core shareholder in ACC.
On February 15 Standard & Poor’s announced that it will make a tender offer to buy a controlling stake in its Indian partner, Crisil, India’s largest credit rating agency, for about $55 million.
Apart from Holcim and S&P, under acquisitions announced last year, tender offers by Scottish & Newcastle to increase its stake in United Breweries from 17.5% to 37.5%, and by DHL Express Pte to buy a controlling 88% stake in Blue Dart, are in the market.
