Drop in oil prices will have a ripple effect: Ravi Kapoor

Interview with Head of Corporate and Investment Banking, Citibank India

The global macroeconomic environment is changing quickly, with falling prices of crude oil and slowing economies across continents. This comes as the new government in India is talking about accelerating economic growth. Ravi Kapoor, head of investment and corporate banking at Citibank India, talks to Abhineet Kumar on what it means for the economy and for large banks. Edited excerpts:

How is oil going to affect the markets, globally and in India?

My view is that the drop in prices will have a ripple effect from a global markets perspective. Assumptions on valuations linked to steady oil prices have gone wrong, affecting acquisitions and the capital expenditure plans of global oil companies. The fall will have financial implications for oil companies, which will directly and indirectly impact the bond and equity markets.

The markets will have to go through this period of adjustment and bear the associated volatility. India will not be insulated from the global headwinds driven by oil price slide.

However, at the macro level, it is definitely a positive for India. With oil import of around $160 billion a year, if prices slide by about 50 per cent, there will be a positive impact on our fiscal position, inflation levels, currency and, ultimately, corporate profits.

Do we have a silver lining with the Japanese, Chinese and European markets facing slowdown concerns?

Global economies will go through a phase of volatility, adjustment and restructuring. However, I see this as a big opportunity for India and we should make the most of it.

The IPO (Initial Public Offer) market still hasn't really taken off. Which kind of companies will lead its revival?

The outlook for IPOs is very positive. There is a lag effect from the time the markets start recovering till we see IPOs being priced. Around 80-90 per cent of our IPO pipeline comprises of companies with investments from private equity investors which, three to five years earlier, put money in these and are now seeking exits. These companies also want to raise capital for the next phase of their growth. I think the market will see 30-35 high-quality IPOs, worth around $5 billion, which will lead to a $25-30 bn addition in terms of market capitalisation.

In M&A (mergers and acquisitions) the momentum for cross-border deals is slowing. What is your expectation for the year?

In M&A last year, outbound activity was slow and inbound activity not as robust. The slowing in outbound M&A was because the balance sheets of potential Indian acquirers were stretched and needed restructuring. Select outbound acquisitions will happen this year, provided there are good opportunities, at attractive valuations. Outbound activity is more likely to happen in select sectors like information technology, pharmacauticals and automobiles.

Inbound M&A activity was subdued in 2014 as compared to 2013 primarily because of sellers’ valuation expectations being bolstered by the turnaround in the markets. We expect that with the government’s focus on reforms and desire to revivet the manufacturing sector, inbound M&A will pick up gradually. Strategic international investors will explore investment opportunities in India and be willing buyers if there is a fair price expectation which can help create value for them in the short to medium term.

Last year, we saw two large deals using stocks as currency. Could you elaborate on this trend?

The Sun-Ranbaxy deal was the first truly large one in India where stock was used as acquisition currency. The shareholders of Ranbaxy will own approximately 14 per cent of the combined company, once the deal is completed. This will set the trend for domestic consolidation in India using stock as currency. Internationally, it is common for strategic acquirers to use stock in large M&A deals. Stock-for-stock deals are also one way to bridge valuation gaps, if the buyer accepts stock as currency and is willing to ride the upside of the combined company.

The investment banking market was tough last year; still, you emerged strongly. What have you done differently?

In the past calendar year, although the investment banking wallet shrunk, we had around 15 per cent wallet share in a highly competitive market, comprising more than 20 foreign banks and 20 domestic banks. Through the downturn over the past three years, we retained our team and invested in their development and training. We have kept our client focus intact with our talented sector coverage and product teams.

Is the balance sheet stress in the banking sector a concern?

With the slowing in the economy in the past three years, corporate profitability was impacted, which resulted in asset quality pressure in the sector. The government and banks are focused on resolving the issue of NPAs (non-performing assets) by restructuring, liquidating and rationalising assets. As this process unfolds, banks will also have to address their capital requirements, to participate in the growth opportunity which will arise from the new government’s growth and development initiatives.