Thursday, 18 October 2018

IFR Indian Offshore Financing Roundtable: Part 2

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IFR: One issue that remains a challenge for companies raising capital abroad is that some Indian promoters seem to still want high valuations that were given to Indian issuers in 2007-2008. Also many of the overseas listings have not done well after listing, for example business trusts in Singapore.  Is that a deterrent when one sells an issue abroad?


Bhavna Thakur:  The success or failure of a deal in the international market also leads the way for future companies. For example every time a company will go to the US, the US-based investors will look at MakeMyTrip, when a company goes to London the London investors look at Essar Energy when a company goes to Singapore they will look at Religare Health Trust.  These are cases that set a precedent. 


Paritosh Basu:  Essar’s weak listing should not be quoted as an example for people who want to go for an overseas listing in the future. Nobody could believe that Essar would lose the sales tax case. International opinions said that Essar would win the case. The Indian power growth story has also been affected across the board in India. I can assure you that one Essar will not create a bad event for India and because people know that why it has happened.


Avinash Gupta: I think valuation is always a challenge when you are dealing with personalities whose personal wealth is involved. As a promoter I will want the best price for my company. Surprisingly, it is no different when you talk to professional investors. Private equity guys behave worse than promoters at the time of exiting a company. The regulator has been introducing some checks and balances which are good in the short run but not so good in the long run. For example, the safety net mechanism for retail investors. So I think valuation is something which I guess we will get better and possibly leave money on the table for investors and kind of build a bigger success story.


V. Jayasankar: All of us have been looking at the track record of the last four or five years to say that probably promoters have been a little more greedy if you were to call it that way. There are various factors that are going to valuation.

For example in 2010-2011, India was looking extremely rosy and I don’t think anybody was talking about all these problems on current account deficit or exchange movement. However, 2012 and 2013 have turned out to be very different. The business models of many companies have taken a hit because of the economic slowdown and you cannot blame them for it. Everyone got the macroeconomic picture wrong.  Secondly, if you look at many of the sectors which raised significant amount of equity such as power and infrastructure everyone got the reading wrong on government policies and regulatory issues. So there again I don’t think it is easy to blame anyone, it is an external factor.  Having said that, I have noticed sometimes when companies go public they don’t have a very rigorous system of forecasting and be in a position to deliver. Today internal factors, regulatory and macroeconomic issues are all playing at the same time and you are probably seeing more number of companies having lost value compared to where they listed.


IFR: How does one increase coverage on a stock once it gets listed because in some instances we have seen that once a stock gets listed, there is no follow up of investor meetings by the promoter.


Samarth Jagnani: I think we need to go back to the start of the discussion where the panelists said that there has to be a reason for a company to list overseas.  If there is a reason for the company to list overseas and it has a stable business model then it will grow into a market cap, because few companies can be $1bn plus market cap coming out of a mid cap segment from India.

Brokers cover stocks when investors are interested in it and investors demand that the brokers who they pay cover it, so, it is a cycle. Take a classic example, in good old days Infosys ADRs had a separate set of brokers based in the US who used to cover it.  The same was the case of Wipro, ICICI Bank and HDFC Bank. There were separate local US brokers used to cover them because they were important for their client-base to provide that service. 

I think coverage as an issue relates to the fundamental performances of the company and any good company which has an investor interest will get coverage. 


IFR: What is the standard of corporate governance in India and how good are companies to adapt to the international level of corporate governance that is required when they list abroad.


Avinash Gupta: I think Indian standards are comparable with international global standards and the new Companies Bill will hopefully help the standards rise.

The standard of corporate governance was much lower in the early 1990s when the depository receipt market opened up and approximately 15 Indian companies listed overseas. Investors though are willing to pay for growth and business despite governance issues.


Paritosh Basu: India is in no way far away from anybody in the world in terms of corporate governance regulations. Any shortcoming has also been taken care of in the new Companies Act. A lot of reforms have been done in the areas of inter company transactions and transfer pricing. We are going to see good quality governance from India. Even if companies don’t want to do, they have to do because the regulations will make you to do that. 


Abhimanyu Bhattacharya: From 2005 a company in India trying to access the overseas market had to comply with corporate governance requirements under clause 49 of the Equity Listing Agreement.  The principles that we have here are robust and are fairly comparable globally.


IFR: How do companies continue to be in touch with investors by periodically raising money? Is there more pressure on them to have disclosures?


V. Jayasankar: It is a function of what the business needs are.  If you are looking at an IT services company after the listing it probably does not need any money.  If you look at many of the consumer companies after the initial listing need money only if they are doing an acquisition.    So it is more a function of what the business needs are and if it is a growth company, investors will see a lot of value even if the company doesn’t raise capital. 


Tarun Gupta: Often when you talk to promoters it is only about valuations but there has to be a change in the thought process on how the market for the stock will be after listing. One of the reasons why some of the Indian paper got a bad name was because there was no after market. Today, when an Indian company plans to get listed, bankers evaluate how the liquidity will be after listing, whether the stock will get included in the indices and how many analysts are tracking the sector. I think a lot of panelists talked about sector-specific strengths of various exchanges and that is becoming increasingly important.  Even if a company doesn’t have a follow on offer, the investor expectation is that companies offer non deal road shows at least twice a year to have a regular investor contact and may be Marco you would like to comment specifically from the Swiss Capital market point of view.


Marco Estermann: I think investors specifically of companies that are not domestic companies want to see the promoters regularly passing by explaining their business strategies. That obviously helps the visibility of these companies in these offshore markets and the visibility again helps liquidity.


IFR: Is it easier for Indian companies to raise money abroad or is it easier for them to raise money locally through qualified institutional placements and offers for sales.


Pranjal Srivastava: Overseas listing is more in a discussion stage right now for Indian companies.  In 2005 we had many overseas listings but after that there have been very few listings overseas. Select property companies may be getting listed in Singapore; certain resource companies in London and the technology companies in the US but there again in single digits only. So our sense is that the preference for Indian companies is to do domestic offerings as the investor set is actually present in India. Overseas investors if they see a good story will directly or indirectly participate in offerings in India. So, there is no specific investor presence in certain geographies which will lead companies to go there. The higher transaction and compliance costs and the need to maintain investor coverage are the other hassles of listing overseas.


V. Jayasankar: Many sectors in India trade at a premium to global valuations and hence companies prefer to issue shares domestically. For example, HDFC Bank trades at a  high price to book   multiple  of round 3.5–4 times.  How many banks in the world trade at those kind of multiples? In many sectors such as consumer goods, pharmaceutical and banking, Indian investors including foreign institutional investors are willing to pay that premium and if there is no valuation arbitrage then what is it that a company gets by splitting the liquidity by having an overseas listing?


Bhavna Thakur: I think it is very important that when companies look at international listings they should look at the rationale for it. Are the assets, customers and distributors abroad? Is there a branding need or is there access to local currency for acquisition.

Some sectors which are not well understood in India will try to list internationally but I think bankers like us take the challenge and will explain it to the Indian investor community.  So, I don’t think a company should be afraid of being the first in its sector to list in India. We have proved over the last few years that the scarcity value of a concept stock actually leads to valuation expansion in India itself.   So, I think people will have to think about the reasons why they go abroad, as Pranjal mentioned, because of the costs of listing and disclosure and the potentiality of becoming an orphan stock when research analysts stop covering it.


Samarth Jagnani: There are two single reasons why the share of international fund raising in overall capital market has gone down.  In 2007 around 45%–50% of the total capital raising was done internationally.  In 2009 –2010 it was 30% and from 2011 to now it is around 10%.  The development of the qualified institutional placement market in India and the volatility in the currency have contributed to this trend.

The weak rupee is the main reason that the convertible bond product which was a favorite for many Indian companies to raise money has gone away completely.

Marco Estermann: If you look at primary issuances globally, 80% of them over the last 10 years have been in the domestic markets and only 20% have been overseas primary issuances and I think that speaks for itself.  Still there are advantages of raising capital from strong currency markets. Companies can actually use that stable currency for future acquisitions and therefore future positions might become cheaper relative to raising domestic funds. Also business models of companies in some sectors are better understood by overseas investors, given their sector specialization and long-standing experience and the existing peer group in the overseas listing location.


 To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3

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