'Volatility a risk for Indian IPOs, M&A'
A top JP Morgan banker says volatility may force Indian firms to eye targets in the European and US economies.Updated: Feb 01, 2008 14:51 IST
Volatility is the chief risk to India's record pipeline of initial public offerings this year but if the market shake-out is short-lived, the dip in values should bring quality to the fore, a top JP Morgan banker said.
Sustained volatility may also hurt Indian firms' overseas acquisition plans but they would eye targets in slowing European and US economies and deals would not be as debt-heavy as last year, JPMorgan's India head of investment banking said.
Vedika Bhandarkar told Reuters recent volatility in markets worldwide had already made investors cautious. "What people do talk about is that if volatility continues for a long time what it changes is the sentiment," she said.
The benchmark Indian index is down about 16 per cent from a record set on January 10 and market turmoil forced the Indian venture of Dubai's Emaar Properties, on which JP Morgan is advising, to trim its issue size to $1.64 billion from $1.8 billion, following a similar move by Wockhardt Hospitals Ltd. "Given the recent volatility in the markets globally, the investors have turned cautious," Bhandarkar said.
Before a sell-off swept through bourses worldwide last month and sucked $4 billion in foreign flows from India in 11 trading sessions, billionaire Anil Ambani's $3 billion IPO of Reliance Power, India's biggest to date, was sold out within a minute of its launch.
In Hong Kong alone, five IPOs worth a combined $2 billion have been scrapped or delayed because of market gyrations.
Bhandarkar said short-term volatility would not hurt good quality issues. "The one thing which volatility does do and is good for the market, is that it does bring the focus back to quality. In a bull market you can sell a lot of stuff."
Indian companies had a pipeline to raise up to $15.8 billion from new listings this year, including Reliance Power's January issue, which is almost twice as much as last year's record $8.3 billion, according to Thomson Financial data.
Issues in the pipeline include UTI Asset Management's $500 million IPO and JSW Energy's $1 billion offering.
Bhandarkar said Indian companies were still likely to command a premium over comparable firms in developed markets. "Will you continue to price (an Indian IPO) at a premium to every developed market pretty much? Yes, absolutely. Because on a growth-adjusted basis there is a lot of value for investors."
Bhandarkar said Indian firms would continue to buy overseas firms to access new technology, penetrate new markets and to spread geographically but the deals may not exceed last year's level because of the global credit crunch.
"The big issue really is financing. Can every company get a financing package together? Probably the answer is 'no'."
She said last year saw some "audacious deals", with low equity and a large debt component, but current market conditions would not allow such financing. "There was a time when the market would support it -- there would be financing available. Those times are gone now."
Purchases would now have to be financed differently. "Acquisitions will continue but these will be with much more sensible financing packages and hence probably much more tilted towards large acquirers than small acquirers."
However, sustained volatility could upset even equity financing, she said. "If volatility continues, the acquirer's stock price takes a beating. Then it's not availability of bank loans which is an issue, you're not sure whether you can raise equity either."