 "Ravi Kapoor")
This year so far, a little over $2 billion has been withdrawn by foreign institutional investors (FIIs) from Indian stock markets. Banks’ non-performing-assets (NPAs) are rising and the celebrated digital start-ups are now finding it difficult to raise further funding. Ravi Kapoor, head of corporate and investment banking at Citi India, spoke to Abhineet Kumar on where the opportunity is for banks amid global turmoil and what investors expect from the coming Union Budget. Edited excerpts:
What in the Budget would investors would like to see?
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A growth and reforms-oriented budget, one that would provide further stimulus to the economy, on the back of fresh investments to propel growth. Specifically, increased spending by the government in infrastructure and accelerated capital expenditure by Indian Railways towards modernisation. Investors would also welcome the government encouraging cash-rich public sector units to invest in creating new assets. In investor eyes, India has potential for an uptick in growth and is well placed in the global scenario.
What compulsions could stop the government from doing that?
The budget is a balancing exercise; it will be a question of how much of resources the government has at its disposal. More funds are needed to accelerate growth and on the other hand, the government needs to support the rural economy, which has struggled on the back of consecutively weak monsoons. Finally, the focus is also on maintaining the fiscal consolidation targets.
With rising NPAs (non-performing assets) in public sector banks (PSBs), do you think a large chunk of government resources now needs to be directed for that?
The government does need to provide capital support for PSBs and I believe we are taking stock. However, the first step would be to assess the extent of gross NPAs in the system and how much capital is needed across all PSBs to incrementally provide for NPAs. The next step should be to solve for the sources of capital. Apart from the government's capital support, PSBs will have to access alternative sources like equity capital markets, offshore additional tier-I and onshore tier-II bond markets, and the sale of assets and investments to release capital. Citi has a lot of experience in G3 bonds (issued in dollars, yen and euro) and has been a leader in this space.
Through the years, we have been at the forefront of raising both equity and debt capital for the banking sector and will continue to support their growth needs this year. To my mind, the fund raising initiatives will take several quarters.
Rising NPAs also mean a larger number of M&As (mergers and acquisitions) related with the stressed assets. An opportunity for you?
Stressed assets do provide an M&A opportunity across all sectors. Our discussions with clients and investors reveal there is enough interest from asset reconstruction companies, Indian corporates and financial sponsors to buy these assets at a value. Banks will need support to hive off their stressed assets or to monetise their investments in non-core assets and joint ventures. This also provides advisory and financing opportunity for potential corporate buyers and financial sponsors, which we continue to evaluate for our clients.
Do Indian corporates have capital to acquire these assets?
They have capital but it is mostly locked into assets and running of multiple businesses. Going forward, Indian corporates will have to release capital from non-core, non-scalable, non-profitable businesses, and reallocate these towards acquiring stressed assets or investing in new opportunities which come their way as the government drives its Make in India initiative.
We have now officially entered a bear market. How do you see IPO (initial public offer of equity) market getting affected?
We saw significant recovery in primary market activity last year, with over $2 billion (Rs 13,800 crore) raised via IPOs. There is a decent spill-over of the IPO pipeline into this year from companies looking to raise fresh equity capital for future growth or to provide their existing sponsors an exit opportunity.
Overall, investors have been supportive of IPOs with scalable business models, good sponsors, visible earnings growth and with high corporate governance profiles. IPO activity picked up in 2015, with volumes the highest in five years and deal sizes increasing. Citi successfully executed two of the three largest. However, the volatility in the secondary market might eventually start impacting the investor appetite for IPO issuances as well. These two markets are likely to converge at some point in time.
The global macro looks grim -- slowdown in China, negative interest rate in Japan, bruised economies in Russia and Brazil, stressed banks in Europe. What does it mean for FII investments in secondary markets in India?
So far this year, $2 billion has been withdrawn from the equity market by FIIs because investors globally are in a risk-off mode. However, this situation can be reversed and India can stand out from the emerging markets cluster on the back of accelerated reforms, fresh investments and growth drivers introduced by the government. The fundamentals of our economy are strong, the macros have stabilised and the currency has held up relative to some other EMs. We only need to give investors the confidence of growth and stability. The government’s ability to communicate to the larger investor community has helped.
How do you see the opportunity in digital start-up businesses, especially when there is talk of high valuations?
Citi has been active in supporting our global investor clients to evaluate and invest in the growing internet opportunities in the Indian market. Last year, we advised Paytm on their fundraising from Alipay and Alibaba. We've seen that internet companies do have a sustainable business model. The digital delivery model helps improve customer service and reduces costs for retailers.
From a funding point of view, yes, there is a slowing of capital. Investors are becoming discerning and providing capital support to companies with a scalable and sustainable delivery model. As the sector grows, there will be more and more focus on profitability, governance and returns. The good part is that many e-commerce companies are focused on building strong businesses and extending the longevity of their capital, as well as sensible consolidation.
