Investors are discerning, investing only in quality deals: Raj Balakrishnan

Investors are happy to accept a lower cost of capital for companies, which have the right governance structures, good management, and excellent track record, says Raj Balakrishnan

The Sensex is hovering around lifetime highs, but primary exuberance is missing. Raj Balakrishnan, head of India investment banking, Bank of America Merrill Lynch, tells Sundar Sethuraman and Samie Modak that investors are sticking to companies with good governance structures and track record. Edited excerpts:

How is all the negative news flow affecting deal activity? 

Investors are not exactly rattled. Take a look at the deals we have executed in the past six months. Real estate is arguably one of the sectors most affected by the non-banking financial company crisis. Yet, we successfully launched the Embassy real estate investment trust (REIT) initial public offering (IPO), which was received very well by the market. We also closed the Vodafone Idea rights issue and two block deals for Standard Life to sell stake in HDFC Life. Companies with a strong track record and the right governance framework will always attract investors.

Such deals have been few and far between. Are the markets lacking the vibrancy one expects?

Historically, whenever markets have been exuberant, investors lose discrimination and lap up every issue. But that’s not the case at present. This makes one optimistic. Despite market buoyancy, investors are discerning, investing only in quality companies and deals.

Are investors going overboard with valuations of good companies?

Investors are happy to accept a lower cost of capital for companies, which have the right governance structures, good management, and excellent track record. Markets are about risk and reward.

What does the deal pipeline look like? How was the first half?

The first half was extremely busy. We have a clear strategy called ‘responsible growth’. We don’t chase every deal on the Street, but focus on quality ones. While everyone was concerned about the sluggish deal momentum ahead of the elections, we successfully managed to execute quality deals during the first half this year. This week, we launched Godrej Properties’ $300-million qualified institutional placement and Adani Ports and Special Economic Zone’s $750-million bond — two excellent deals. 

In terms of IPOs, how does the pipeline look?

There are a few high-quality deals we are working on, but these are in the early stages. 

Foreign flows have been chunky. How does it impact deal-making?

Foreign institutional investor (FII) flows have been volatile, but for quality names, even in tough times, we can attract demand. When both FII and domestic flows are strong, any bank on the Street can get a deal done. But when markets are slightly weak, that’s when the quality of the bank executing the mandate makes a difference. The global relationships we have with investors and the diligence standards we follow give clients the comfort to work with us. 

Do you think companies in trouble will be able to raise capital?

Yes, and in fact, some of the banks that are facing challenges could very well raise capital. The question is whether the management is willing to face the reality. Does it acknowledge issues it has and does it tell you the way it wants to deal with the problems? Investors are looking at this kind of transparency.

How is the India-US friction impacting sentiment?

The impact might be felt in the long run if trade issues continue in the current manner. We believe the India-US trade issue would get resolved. There is concern about the rhetoric, but we believe there will be a meeting ground and a sensible solution will be found. 

How will the softening of the US bond yields play on the market?

The US Federal Reserve will most likely ease in the near term. Therefore, it is a great time for people to go out and raise long-term funding. 2018-19 was a tough year from a market perspective. Primary markets were virtually shut from August 2018 to February this year. But since then, markets have been constructive. This is a big positive for anyone looking to raise funds.

Economic growth is slowing. How big a concern is that?

That is a concern obviously and a key reason for this was the higher interest rates. Unfortunately, our interest rates were too high and that’s probably why our economy has slowed. We believe there is a lot of room for bond yields to come down and inflation to rise somewhat without getting into panic mode.

Any particular regulatory changes needed to boost deal activity?

The Securities and Exchange Board of India (Sebi) has been remarkably proactive. Take the changes related to REITs and infrastructure investment trusts framework or the recent proposals to speed up the rights issue process. Another issue corporates face is of taking companies private in India. But Sebi has been reasonable, even on the delisting front. It has already come out with regulations, which are yet to be tested. Consistency in foreign direct investment policy is another area investors care about. We believe all these concerns would be addressed in the near future. 

Will the success of Embassy REIT lead to more such issuances?

There would be more REITs hitting the market, but we need to wait for quality companies. We may have another REIT most likely next year.