Global investment banks are pinning hope on attractive financing markets for a revival of outbound acquisition by Indian companies this year.
Banks such as Morgan Stanley, Barclays and JP Morgan have had a tough year. Investment banking fees in the sector declined 46 per cent to $282 million in 2012, estimates Dealogic for the calendar year till December 7.
Dealogic is a London-headquartered firm providing consultancy services to global investment banks.
The banks are hopeful the government's divestment plan will provide a much-needed push in 2013 to revive the capital markets. Last calendar year saw a 77 per cent decline in the volume of initial public offerings (IPOs), to $314 million tillDecember 7. However, a $830-million IPO from Bharti Infratel at the fag end of the year proved a saving grace.
V K Bansal, chairman, Morgan Stanley India, said, "The view that we have is in the April-to-June quarter, you would probably start seeing good-quality IPOs entering the market. Besides, the January- to-March quarter will see large follow-on offerings and government divestment."
He is pinning hope on the government's need to bring down the fiscal deficit before the annual Budget. The banks are also hoping that sentiments will improve after the Budget, facilitating the platform for high-value IPOs from companies such as Vodafone India, which have been waiting for policy clarity.
The silver lining in the capital markets story in 2012 has been the growing demand for debt capital. In 2012, Indian issuers tapped the dollar-denominated market for a total of $8.1 billion, up from the record of $8 billion achieved in 2011. This was primarily at the back of Reliance Holdings' $995 million bond in February and State Bank of India's $1.2 billion bond in July. Total volume for debt capital climbed to $40.5 billion in 2012, up three per cent year-on-year.
"We do expect more and more issuers to tap debt capital markets, both onshore and offshore in 2013," said Jaideep Khanna, managing director and head of corporate and investment banking at Barclays India, who have been involved with leading debt transactions this year.
With the Basel-III norms raising banks' capital requirements, quality borrowers will be able to raise funding more efficiently by tapping bond markets. However, corporate issuers are waiting for some more clarity around the reduction of withholding tax applicable to bond issues.
"While we expect increased cross-border issuance activity, in domestic markets, too, we're seeing increased demand from investors for high-yield paper," he said.
The biggest challenge banks are facing is on mergers and acquisitions (M&A). In 2012 for the period till December 7, there was a 65 per cent volume drop in inbound acquisitions to $10.5 billion. The total volume for M&A transactions in 2012 was two per cent down to $43.3 billion, as outbound deals picked up by 34 per cent to $14.5 billion in the year. This was primarily boosted by Oil & Natural Gas Corporation's $5 billion bid for assets in Kazakhstan.
"The macro environment globally is still uncertain and companies with a strong capital structure will definitely do better and be able to withstand volatility," said Aisha de Sequeira, managing director, Morgan Stanley. Besides, financing markets globally are very attractive with low interest rates, beneficial for Indian companies which prefer leveraged buyouts by putting debt on target companies, she explained.
Sectors largely insulated from government policies such as financial services, technology and healthcare would see more M&A activity in 2013, vis-a-vis sectors such as telecom which are prone to policy infirmity. Minerals and resources will continue to see outbound interest for M&A in places such as Africa and Southeast Asia.
"We don't expect the balance sheet of Indian firms will turn around in a hurry," said Rohit Chatterji, head of investment banking at JPMorgan India. "But the deal environment will be better in 2012, as financing will be reasonably strong."