IDFC Capital, the investment banking arm of Infrastructure Development Finance Corporation, has placed equity worth Rs 10,000 crore for its clients in the current financial year. In an interview with Sudeep Jain and Sumit Sharma, Group CEO (Investment Banking and Securities) Tapasije Mishra talks about pricing challenges in IPOs, the outlook on PSU divestment and new areas of opportunity in the infrastructure space. Edited excerpts:
India plans to double spending on infrastructure to $1 trillion by 2017. Where do you see the money coming from?
Total investment in infrastructure has increased from 4.3 per cent of the GDP in 2000 to 7.3 per cent in 2009, and we are on our way to exceed the government’s near-term target of nine per cent. What is remarkable in the India story is that 50 per cent of every incremental rupee in Indian infrastructure is being funded by the private sector. This implies the private sector has the ability and willingness to invest in core infrastructure and projects are commercially viable. There is no funding constraint for commercially viable projects. The government will need to focus on removing bottlenecks like land and environment approvals, among others.
What kind of infrastructure stocks will investors focus on?
Infrastructure stocks trade at a 25 per cent valuation premium to the Sensex. Investors are now focused on infrastructure businesses that will deliver free cash flows to equity and are not excessively levered. An entire generation of new and exciting business models and entrepreneurs are set to enter the capital market over the next two years — the flavours will certainly change but the sector will enjoy its leadership position.
What’s the outlook across different infrastructure sectors?
The ports sector has witnessed a silent privatisation. Terminal capacity is no longer a constraint and productivity levels have improved dramatically. In many recent government PPPs (public-private partnerships), private sector bidding has been aggressive and greenfield ports have offered better equity returns. The next round of reforms are now due in the sector to ensure we keep up the pace of investments. The road sector continues to witness strong developer interest from a bidding perspective. The next five years will see over $10 billion of investments as the pace of execution improves.
Telecom has been a great success story in the recent past. However, new competition has moderated returns and sector consolidation will happen once the policy framework permits it. Telecom towers (passive infrastructure) would be an interesting new area for capital market investors.
Will the government be able to meet its disinvestment targets?
I have no doubt that the disinvestment programme will meet its targets. The Department of Disinvestment is clearly on the ball and there is an enthusiastic fervour to the pace of activity.
These large flotations are attracting a whole new set of institutional and retail investors. Engineers India was a big success recently, which saw over 160,000 retail applications and a strong post-issue performance.
The quality of the government issues is unquestionable; inclusive pricing is the key to sustain the strong demand.
Has pricing of recent IPOs been a challenge?
We are seeing very strong investor interest for quality issues. Institutional investors remain sensitive to issue pricing. Transactions that witness quality institutional support are attracting overwhelming demand from non-institutional and retail participants.
The recent Gujarat Pipavav Port Ltd IPO, which was oversubscribed over 19 times, is a case in point. It is either a drought or a flood — a peculiar market situation.
Are retail investors actively participating in IPOs?
Retail investors are more discriminating than in the past. A very strong retail response has been seen in IPOs, where money has been left on the table by issuers. Sebi’s recent move to separate issue closing dates for institutional and retail investors is a right step. It will ensure a clear visibility into the quality of institutional response. Responsible issue pricing is the key.