Indian ECM volumes set to rise, while fees stay low
A number of eye-catching deals in the Indian market in 2015 are creating excitement for bankers about the potential pipeline of deals this year.
The HQ of Coal India, which successfully completed a follow-on offering this year
Indian equity capital markets (ECM) are showing signs of a strong 2015 after several large deals indicated a healthy appetite for the country’s stock offerings.
Coal India and HDFC Bank successfully completed follow-on offerings this year and bankers believe that a strong pipeline of deals could come to market as the year progresses.
A combination of low oil prices, bullish views on India’s new government and diminished sentiment on some of India’s Bric rivals are believed to be contributing to the enthusiasm around Indian issuance.
Sanjay Bajaj, head of ECM, India, at HSBC, tells Euromoney the market might be heading towards $20 billion to $25 billion of equity capital raisings in 2015.
“A lot of companies have placed their equity capital raisings on hold for the last few years,” says Bajaj. “Banking is one area we will see offerings, and there are also lots of infrastructure projects in areas such as power, airports and roads that will look for capital.
“For the real-estate sector, we could also see the emergence of newer fundraising instruments such as Reits in India this year.”
HDFC Bank buoyed the Indian market further with two separate follow-on deals in February, the first raising around $1.25 billion through the issuance of American depositary shares and the second around Rs20 billion ($324 million) through a qualified institutions placement in India.
And after the strong start to the year for dealmakers, the flow of transactions looks set to continue with a sense of excitement building around the Indian deal pipeline for 2015.
“We have not seen a large IPO for a while in India,” says Gaurav Mehta, head of corporate client solutions, India, at UBS. “I don’t think we’ll see $1 billion-plus IPOs hitting the market in the near term, but could see significant activity in the $200 million to $400 million zip code.
“We do see a lot of activity in large follow-ons and with blocks – both private sector and government disinvestment. FIG is one sector that could be very active here – including 2016 onwards activity within the insurance subsector. The broader infrastructure sector could also be active and we should see IPOs in TMT, particularly tech, from 2016 onwards.”
Sumit Jalan, head of India ECM for Credit Suisse, says he is having a lot of conversations with Indian corporates on primary capital raisings and there could be as many as 15 to 20 sizeable transactions this year.
“However, investors are quite discerning on India and they want quality names,” he continues. “Last year, there were a lot of highly leveraged companies, but people are now looking for quality. There is a healthy pipeline building in financial services this year, and also deal flow in the e-commerce sector towards 2016.”
From our perspective, it’s very much a part of a broader franchise. We are thinking of it as doing a good deal for the government. You don’t make money on these deals
The improving fortunes of the Indian ECM are being viewed as an aligning of the stars for the market by some, with several key factors going the country’s way at the same time.
“The buzz in Indian ECM is the convergence of a few factors,” adds Jalan. “The Modi government is making the right noises, but there were factors that enabled the market to pick up prior to when the new government came into power.
“The Bric countries that India normally competes with are struggling somewhat, which allows India to stand out a bit more. The drop in oil prices is also conducive to India, as we are one of the largest importers of oil.”
One thing that has not changed is the meagre level of fees available in Indian ECM. The biggest deal of the year so far came when the government of India raised close to $3.7 billion when it sold a 10% stake in mining company Coal India in January. The follow-on deal was the third-largest Indian ECM deal on record, according to Dealogic.
Coal India’s IPO in October 2010 is notorious in Asian investment banking circles. The six mandated bookrunners on the IPO were Citi, Deutsche Bank, Morgan Stanley, Bank of America Merrill Lynch (BAML), Kotak Mahindra and Enam Securities.
BAML and Deutsche were mandated again for this year’s Coal India follow-on deal, along with Credit Suisse, Goldman Sachs, JM Financial, Kotak and State Bank of India.
The six mandated bookrunners on the Coal India IPO received a fee of just 0.000001% of the deal proceeds, and Euromoney understands that low fees were again the order of the day with the recent follow-on.
“Nobody does these deals for a fee,” says a source at BAML. “From our perspective, it’s very much a part of a broader franchise. We are thinking of it as doing a good deal for the government. You don’t make money on these deals.
"We and a few others … have a broad business in India that encompasses all sorts of products. Everyone from the government appreciates the banks that got that [follow-on] done.”
Some market participants questioned the absence of Citi and Morgan Stanley from the lead group for the follow-on. One of the rationales for doing low-fee IPOs, such as Coal India's in 2010, is to be in a position to pick up follow-on business.
Sources at Citi say the firm had not bid for a position on the latest Coal India share sale. Morgan Stanley declined to comment.
Credit Suisse, alongside Goldman Sachs, was one of the international banks that pulled off an admirable coup by getting onto the Coal India follow-on deal when they were not on the original IPO.
A source close to Credit Suisse points to the work it has been doing for the government before this deal as a contributing factor in its inclusion.
“I would say we have been doing a lot of advisory work in mining, energy and these type of things,” says the source. “We were quite active in offering solutions to the government. I think clearly from their perspective, they wanted to diversify their banking base. They feel it was a good time to bring us in.
“This clearly was like the crown-jewel trade for the government. I’m not sure in the private sector it’s an advantage, but we could have an edge for government deals in the future. And this is not small in a league table context; half a billion in league table credit per bank.”