Vikas Khemani, president and chief executive officer of Edelweiss Securities Ltd, spoke in an interview on why the financial services sector is leading deal activity in equity capital markets, the quality of companies going public and revival of capital expenditure.
More needs to be done on the regulatory and investor awareness fronts to make infrastructure investment trusts (InvITs) successful, Khemani said. InvITs are trusts that manage income-generating infrastructure assets, offering investors regular yields and a liquid way to invest in infrastructure projects. Edited excerpts:
This year, most of the IPO (initial public offering) as well as QIP (qualified institutional placement) activity has been dominated by the financial services industry. What is driving this activity? Do you expect the trend to continue?
Whenever economic activity picks up, banking always ends up being the largest raiser of capital for the simple reason that capital is a raw material for them. That was the case in the previous cycle and it is the case in this cycle too. The difference in this cycle is that there are different players accessing the market in this space because of the width that has been developed in the sector. Allied financial services like insurance, depositories, AMCs (asset management companies) and exchanges, they are also accessing the market because they have gained significant scale in the last 10-12 years.
Now is a good time for them to access the public market from an acceptability and demand perspective. That’s a reason you are seeing a lot of them coming through.
Financial services is close to 30% of the index weight, which shows that the sector is very important for the economy and the markets. And if the economy were to grow, the sector will have to raise capital. So, I am sure that the trend will continue.
Do you see capital expenditure (capex) coming back? Are people looking to raise primary capital for capex?
There are companies that are looking to raise primary capital. We are beginning to see a trend where a lot of traditional industries are planning for capex. We might see a good amount of capital raising in the construction sector. You might see manufacturing capex picking up as well as in chemicals, fertilizers and food processing. You will not see capex in large chunky sectors such as power, but we are seeing capex in allied infrastructure sectors. Overall, we see there is a recovery in capex.
How different is this IPO market from those that we saw in the earlier periods?
This time around, the diversity of the sectors has been very high. In 2005-2007, we were largely an infrastructure and commodity driven play, partly because of global commodity prices and partly due to the local infrastructure boom. This time around it is financials, healthcare, consumer (sector), etc. The diversity of sectors has picked up and it just shows that the economy has widened, diversified. It’s a function of the growth of the economy and per capita income. As your per capita income goes up, you start to see healthcare services develop, consumer spending grow and thus new consumer businesses getting created.
Also, we see that only quality gets rewarded. Certainly today, there is a flavour for quality. Investors are willing to pay a premium for quality.
As regards InvITs and REITs (real estate investment trusts), why do you think these products have not taken off?
We have had two InvITs and both of them were good products. One of the challenges was that we had a wrong setting of expectation within the investing community, where people started to expect a listing pop like in equity IPOs. You can’t have a 10% or so listing pop on a fixed income type of product.
Also, unfortunately still, many mutual funds and insurance companies are not geared up to invest in them. Unless the institutional investing class comes ahead to underwrite these offerings it is going to be difficult. It is very essential that institutional investors take the lead.
It is unfortunate that it is taking time because on one side you have this huge need of capital and on the other side you have huge amounts of capital that is looking for yield. A lot more needs to be done, especially from a regulatory environment perspective and awareness perspective.
The IPO market seems headed towards almost $10 billion in equity issuances this year. Do you think this momentum, both on the supply and demand sides, will continue in the next year?
It will be a problem if it doesn’t. If you don’t have new paper supply then a bubble gets built as the liquidity will chase the same stock available in the market. It is very important for the balance of the market that good quality new paper is coming in. The good part is that in India $1 billion and $2 billion IPOs are becoming real. Historically, we haven’t had many billion-dollar IPOs in India.