FT : India’s Yet Untapped Domestic Savings Pool

Saturday, November 6, 2010

India’s staid public sector companies are usually the last to attract interest from foreign investors.  But in the past week, a stodgy government monopoly, Coal India, the world’s biggest miner of the fuel, staged the country’s biggest listing.  The $3.4bn initial public offering attracted cash offers worth 15 times the stock available from investors from all over the world.  “Indian capital markets have arrived on the global stage after Coal India,” says Vikas Sharma, president and chief executive of Nomura in India.  Under Indian rules, investors’ bids for the stock had to be fully funded, meaning they had to front up with the equivalent of a total of about $51bn in cash, says Mr Sharma.  “That leaves about $48bn of capital still on the table waiting for the right opportunity in India after this listing. By any stretch of the imagination, that is a large amount of money.”  Stocks are not the only area of Indian corporate finance generating international excitement.

Five years ago, mergers and acquisitions worth more than $1bn were almost unheard of in India.  So far this year there have been 13 deals of this size and larger, according to figures from Dealogic.  The increased deal volumes stem from higher liquidity in western markets and India’s strong growth story.  The economy is expected to expand more than 8.5 per cent in the year ended March 31, compared with 7.4 per cent a year earlier – growth rates that most developed markets can only dream of. “Why are investors looking at India?  It’s purely because of the growth differential,” says Nilesh Shah, deputy managing director of ICICI Prudential Asset Management in Mumbai.  So far this year, Indian companies have raised equity of $26.02bn, a figure approaching the full-year record of $33.99bn set in 2007, according to Dealogic.  Bankers are preparing to compete over the next five weeks for the mandates of more large government deals, including the $4.3bn secondary offering of Indian Oil, the state-owned petrol refiner and retailer.

The volume of India-related M&A deals this year has reached more than $67bn, nearing the 2007 record of more than $76bn, representing an extraordinary recovery from the economic crisis.  Frank Hancock, head of corporate finance at Bar-clays Capital in India, says: “You’re seeing an Indian outbound M&A paradigm driven by the search for energy security, new technology and new markets, as well as labour cost arbitrage, which involves taking a process back to India and doing it cheaper.”  Natural resources remains one of the dominant themes, particularly coal. India’s plans to roll out more than 100,000 megawatts of power generation capacity in the coming years will require new sources of coal.  This was one of the drivers behind the Coal India IPO.  The country’s growing hunger for steel is also driving demand for coking coal.  “People are usually extremely interested in any discussion around coal,” says Vedika Bhandarkar, vice-chairman for Credit Suisse in India.

Information technology outsourcing companies are also looking for acquisitions in continental Europe and Japan to augment their success in the UK and the US, she says. Bankers say that as Indian companies pursue more M&A offshore, the opportunities for ancillary business for international investment banks are also growing. Companies are now seeking not only the initial bridge financing for deals but also refinancing and hedging.  In spite of the current bullishness on India, bankers say that the country needs to develop more depth in its financial markets if it is to gain insulation from global boom and bust cycles.  Only a small fraction of the country’s domestic savings, which are among the world’s highest, are deployed in the stock market.  The corporate bond market is also illiquid and small, forcing Indian companies to continually seek financing overseas.  “History shows that foreign liquidity usually disappears just when you need it,” says Mr Hancock.  “There’s huge wealth here in India that can be tapped more effectively.”

Reference : The Financial Times, Nov 1 2010.

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