Indian companies that flocked to the equity markets to fund growth during the three-year bull run will increasingly raise debt in order to leverage strong balance sheets and finance buyouts, a top Citigroup banker said.
The ongoing sell-off in global stocks, with India among the hardest-hit markets, should also make debt issuance look attractive to companies looking to raise capital.
Pramit Jhaveri, head of investment banking at Citigroup in India, also said he expected robust M&A activity in India to continue, with global companies increasingly buying to tap the country's domestic consumption growth. "The last 2-3 years have seen significant amounts of equity being raised. Indian companies are, however, extremely comfortably levered currently, and therefore we expect to see a significant amount of debt issuance going forward," Jhaveri said in an interview on March 12 at his office.
Indian stocks have fallen nearly 16 percent since their all-time high reached on February 9, and a prolonged slide could spoil the equity-raising hopes of companies in India and elsewhere when faced with a risk-averse market.
"To a certain extent there will be an impact, because this correction has happened at a time when there is a significant amount of issuance activity planned. This will get people to pause in their tracks for a while, which is not a bad thing. At the same time it is too early to start worrying about," he said.
"Equity issuance that was imminent may have to take a re-look and apply a bit of a wait-and-watch," he added.
FINANCING DEALS:
Jhaveri said a spate of acquisitions by Indian companies that will need to refinance short-term borrowings should help drive debt issuance this year.
Since the start of 2007, Tata Steel, Suzlon Energy Ltd and aluminium producer Hindalco Industries Ltd have announced buyouts worth a combined $16 billion.
"If you look at recent cross-borders deals, that's a significant amount of debt that needs to be raised," he said.
Indian debt capital markets activity rose 28 percent to a record $13.7 billion last year, according to Dealogic, but issuance was dominated by banks and a $2 billion offering from manufacturer Reliance Industries.
Banks are still expected to be avid issuers. Early this year ICICI Bank generated orders of $8 billion for its $2 billion issue as global investors snapped up the offering amid a relatively scarce supply of overseas Indian debt.
Citigroup topped the Dealogic league tables for core investment banking activity in India last year and was second behind local player ICICI Bank in debt underwriting.
The market going forward should broaden, said Jhaveri, predicting that between six and 12 bond issues this year could top $500 million. He expects a similar number of big initial public offerings.
On the M&A front, Jhaveri said the recent flurry of Indian megadeals was neither an aberration nor a trend.
"$15 billion and $10 billion, those are going to be fewer, but $1 billion-plus, you're going to see. I think you're also going to see the reverse, which is multinationals doing the same in India," he said.
British cellular giant Vodafone Group Plc last month agreed to pay $11.1 billion for control of the Indian operations of Hong Kong's Hutchison Telecommunications International Ltd.
He said that in certain sectors such as information technology, bigger companies grow faster, which would drive buyouts.
"There are enough sectors where this is going to happen, whether it's industrials, whether it's IT services, whether it's health care," he said.
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