IFR India CM Roundtable 2010

IFR: One of the issues that always comes up when discussing M&A in India is the fact that a lot of companies are family owned. This has acted as a drag on M&A activity. Are things changing on this front? Are family-owned companies willing to sell out or dilute? Kishore Kumar, HDFC Bank: Yes. I think just as the make or buy decision for a corporate I think Indian entrepreneurs are also now increasingly at a crossroads and are facing decisions as to whether they continue to run their companies or cash in and take the money while the going is good. We have already seen a couple of large examples of that in the pharmaceutical sector and I think there are going to be increasing occurrences where deals will happen as a result of that. I think Indian owners are becoming much more pragmatic, because it’s a question of making a call on the incremental outlook for ROE. So if they feel ROE on a certain business has plateaued, they understand there is probably little point in hanging onto it for sentimental reasons so therefore they are ready to exit. We will definitely see greater inbound acquisition activity happening. As for outbound acquisitions, I agree with Kalpesh. There may not be too much need for LBOs because assets are available in Europe at close to book value, so there is not much activity happening in that regard and not many people want to acquire those assets. But Indian companies that have deep pockets are looking outside and the valuations on deals they said no to three years back are back on in some cases because assets are available at throwaway prices. And some of the European banks who had shut the stable door and become ultra-conservative over the past couple of years of shocks now have too much money so are ready to lend. Continental, for example, which had a junk rating, was able to raise money quickly at 100bp lower in the most recent tranche that it raised abroad. For some of the Indian companies who want to acquire companies abroad and are willing to provide the corporate guarantee of the Indian parent will be able to raise good money to finance such acquisitions. IFR: Nirav, what kind of pipeline do you see and what are your expectations, based on conversations you have with clients? Nirav Dalal, Yes Bank: I have never seen the kinds of activities that we have seen in the Indian domestic bond market that we’ve seen in the last six to 12 months. I don’t think I have seen the Indian bond market as active and vibrant, and I’m not only talking in terms of the volume of issuance but more in terms of the nature of corporates that have been accessing the domestic bond market. And as somebody was pointing out earlier, we rarely used to see non-Triple A issuers accessing the Indian capital markets. Today the amount of issuance that has been done in the sub Triple A segment over the last six to 12 months has exceeded our wildest expectations. So we’ve been very pleasantly surprised by the fact that there is a tremendous interest insofar as corporate India is concerned in terms of the domestic bond market. The use of proceeds could be plain long term working capital financing, it could be a war chest for potential acquisitions or it could be purely refinancing existing expensive foreign currency or rupee debt. So I’ve never been so optimistic about the Indian bond markets as I think I am right now. IFR: Prakash: are the kinds of highly structured acquisition financings that we see in international markets available here in India? Prakash Subramanian, Standard Chartered Bank: Sure. I think one of the things you look at when you mount an acquisition is obviously building a war chest and have it ready or once you’ve identified a target. The first thing which we’ve seen in most transactions is you tap the short term loan market immediately for a six-month to one year bridging facility. You go to your relationship banks and raise money straight away from these guys. At the end of that period, once the acquisition is c

IFR: Raman, ratings have come up in a couple of answers so far. We’ve talked about the strong economy. How does that square against the credit quality of Indian corporates from a rating perspective? Raman Uberoi, CRISIL: Well credit quality for corporate India over the last three years has adapted pretty well. In the 2008-2009 period, rating downgrades outstripped upgrades, which put huge pressure on credit quality. There were three broad reasons for this. One, clearly, was the drying up of money. Whether it was foreign debt or equity capital, it just wasn’t available. There was money available on the domestic side, but primarily in the banks and to some extent in the bond market, but availability of money and pricing of money became a little difficult. So corporates started feeling the pressure. Secondly, demand just dried up. Going back to what Rakesh mentioned earlier, export-oriented businesses saw a huge dip in demand. The third area was the currency. All three factors played pretty heavily during the period of 2008 through 2009 and rating changes were typically in one direction: down. We actually started seeing defaults whereas none of our rated entities had defaulted over the previous four-year period. What’s been pleasant is that things have changed very quickly. I think it’s even surprised us. We had not anticipated demand coming back so strongly. Domestic demand and domestic-related sectors have really started doing well. The auto sector is just one example. It really was very, very surprising how the market has came back. Availability of finance also eased quite a bit, so in the equity market in India, we suddenly saw IPOs and the primary market was doing well. Debt was also available. The cost of financing came down and even international money started coming back. So demand and financing costs and availability of finance eased. The only thing which still remains is currency volatility. We were used to a unidirectional move in the currency. but now it just goes all over the place. So I think that issue still remains. But what the demand and the availability of financing have done is improve credit quality. In the last six months of the current year, the number of upgrades we’ve done is nearly twice the number of downgrades, which is positive. But downgrades continue; they haven’t stopped, as some sectors are still under pressure. And some companies which were stressed are still stressed. Overall, though, I think corporate credit quality is definitely far better today and we are seeing ratings move up. Kalpesh Kikani, ICICI BANK: I have a question for Raman, not necessarily related to domestic rating agencies. In that period you mentioned where we saw sharp downgrades onshore and all over the world, do you believe that the amount of criticism that rating agencies got from pretty much everybody was why the return to conservatism was so sharp? I’ll give you an example. One of the sectors that we were most bearish on as a lender was auto ancillary. You mentioned the bounce-back there, but in terms of geographical spread we were very bearish on Europe. We happened to have a bad combination in our book: auto ancillaries in Europe whose customers were European. So we went through about three to six months of pain where BMW, Volkswagen, Mercedes-Benz pretty much stopped buying. We were tracking the monthly order book for our clients and my guess is by about the fifth month onwards, the orders were back. Other than that five-month period where we were probably all depressed and thought we needed to write down all this stuff, pretty much nothing changed in the corporates. So do you believe the rating agencies react to sentiment more than any fundamental changes in the world? Raman Uberoi, CRISIL: With hindsight we can come up with all these things but there was stress in the economy and there was stress for these companies - I can talk more about what happened in India than globally. At the time, a lot of Indian ancillaries

IFR: I’d like to start off the conversation on the topic of the Indian economy, which generally seems to be in very good shape. Sunandan, as the economist on our panel, could I ask you to comment on the RBI’s latest rate decision, then talk more broadly about what’s driving the Indian economy and outline any potential red flags? Sunandan Chaudhuri, SBICAP Securities: Thanks, Keith. The RBI decision was broadly along expected lines. We were looking at 25bp on the repo and the reverse repo. It has come at 25bp on the repo and 50bp on the reverse repo. Clearly the RBI has been giving inflationary expectation management a greater emphasis vis-à-vis the growth-inflation trade-off. And taking a step back if we look at the numbers, the industrial production numbers have been fairly strong as far as the last month was concerned. The GDP numbers have also been robust. So by and large, if we are looking at the long-term growth story in India that’s pretty much intact as far as the consumption and investment drivers are concerned. One would have liked to see a bit more robustness in terms of the GDP by expenditure figures restated as they were. Private final consumption expenditure could have been a bit more robust. So could have private investment to conclude that we were seeing a decisive turn in the capex cycle. But there have been good numbers all the same, added to which the fiscal deficit-to-GDP ratio at 5.5% seems to be achievable this time. So I think the positives are clearly stacked up in our favour. The only red flag that one could see on the horizon is inflation, but inflationary expectations suggest that inflation is going to taper off as we move into the fiscal year-end. The monsoons have been good and with a conducive base-effect we should see inflation in the RBI’s comfort zone as we move forward. So I think what I would re-emphasise again is the need to support our growth story on the domestic front and the need for external capital to complement the gap in savings and investment that we seem to have. The flip side of the savings-investment framework is that the current account deficit-to-GDP ratio is moving from 2% of GDP to around 3% of GDP. Now that has to be managed and therein lies the need of foreign capital, apart from domestic sources of capital and this should flow into productive uses such as infrastructure. That how I see the Indian story panning out going forward. IFR: Raman, do you agree with Sunandan’s assessment of the economy and are you in full agreement with the policy framework? Raman Uberoi, CRISIL: I would tend to agree. I think the outlook continues to be robust. We don’t see any immediate issues on the horizon which would force the growth story to taper off. As Sunandan mentioned, I think if private consumption figures had been more robust, it would have been a little more encouraging. But on the demand side, the story appears to be pretty good across most sectors, which is encouraging. So I think it should hold. Anticipation of at least 8% growth over the next few years is out there and should not concern us at this moment of time. I think the only other dampener which could emerge in the slightly longer term is the whole issue of managing growth with adequate quality of manpower. I think that is where India will probably start seeing some issues going forward. IFR: Actually that’s a big issue you’ve raised. How does India deal with that problem? Raman Uberoi, CRISIL: We are seeing issues we had started to see prior to the crisis in early 2008, in construction and infrastructure, for example. Availability of quality manpower is starting to be an issue. I think that is likely to continue. I think it’s important that we figure out issues with respect to technical education, higher education and technical proficiency. I have started hearing that it’s difficult to get quality technicians, even electricians. I think ITIs (industrial training institutes) and other such entities that can help promote thi

Sunandan Chaudhuri, SBICAP Securities Sunandan Chaudhuri is the economist at SBICAP Securities. Prior to his current position, he worked in the financial services group of Tata Consultancy Services, followed by a stint at Fair Isaac Corporation, the analytics company. Chaudhuri is a contributor to financial dailies on issues spanning the Indian economy and macroeconomic policymaking. Raman Uberoi, CRISIL Raman Uberoi is senior director, ratings at CRISIL, India’s leading ratings, research, risk and policy advisory company and a subsidiary of Standard & Poor’s. Uberoi joined CRISIL in 1992. Heading the ratings group, he is responsible for rating entities in the manufacturing, infrastructure, financial, SME and structured finance sectors. His key responsibilities include formulating business strategies, managing client relationships, and ensuring quality and consistency of ratings. As a member of CRISIL’s rating committee, Uberoi is closely involved in benchmarking entities on key risk parameters and assigning ratings to these entities. Exposure to emerging capital markets globally has also contributed to his robust knowledge base. Rakesh Singh, Rothschild Rakesh Singh joined Rothschild in 2009 and has over 16 years of experience in capital markets in India. He is focused on structured and leveraged finance. Prior to joining Rothschild, he worked at Morgan Stanley, Merrill Lynch and Standard Chartered Bank. Immediately prior to joining Rothschild, he was managing director in Morgan Stanley’s strategic finance group responsible for making principal investments in India in growth companies via mezzanine instruments and convertibles. At Merrill, he led successful capital raisings for ICICI and advised leading Indian business houses on acquisition financing opportunities. Kishore Kumar, HDFC Bank Kishore Kumar is the country head, investment banking at HDFC BANK, one of the fastest-growing private-sector banks in India. Debt and equity origination, domestic and international placement and syndication through public and private routes, M&A advisory, and capital market intermediation are Kumar’s key functions in his current assignment. Kumar has been with the bank for more than 12 years, in charge of key functions in wholesale banking. He has also pioneered and spearheaded the microfinance foray of the bank. Prior to joining HDFC BANK, Kumar worked for the State Bank of India group for two decades with a variety of assignments in India plus stints in Los Angeles and in SBI Capital Markets, the merchant banking wing of SBI. He also has strong experience in rural and SME banking. Kalpesh Kikani, ICICI Bank Kalpesh Kikani is senior general manager and head of investment and commercial banking at ICICI Bank, India’s largest private sector bank. Kikani started his career with the ICICI Group in 1995, working mainly in corporate and investment banking. He was a founding member of ICICI’s strategic business unit for investments in the oil and gas sector. He was also part of a team which set-up the first relationship team for all ICICI Group companies, cross-selling all banking products to the top 100 companies in India. In 2001, he was involved in creating a market for distressed debt in India and was a founding director in ARCIL, India’s first asset reconstruction company. He continues to be involved in the distressed debt sector in India and is a key member of the Corporate Debt Restructuring (CDR) Committee in India. In 2003-2004 he moved to London to set up ICICI Bank UK’s corporate and investment banking business in Europe focusing on advising and investing in cross-border M&A. He is now based in Mumbai. Nirav Dalal, Yes Bank Nirav Dalal is managing director, debt capital markets at Yes Bank. The DCM group was formed in 2005 with a vision of creating a buoyant domestic debt franchise with deep-rooted knowledge of underlying market dynamics, coupled with strong distribution and structuring capabilities. Dalal is responsible f