Citigroup Sees Indian M&A Gaining as Seek Debt Fix
Indian companies including real estate developers and infrastructure firms may sell assets to pare debt amid shrinking opportunities to raise funds, the nation’s top adviser for equity offerings said.
“Companies need to correct balance sheet leverage,” Ravi Kapoor, the Mumbai-based head of investment banking at Citigroup Inc. (C), said in an interview at his office on Aug. 8 without naming any firms. “The equity markets are not around, so they will consider merging with companies with healthy balance sheets or try to divest assets.”
The highest interest rate among major Asian economies has resulted in a jump in borrowing costs for companies, prompting them to put expansion plans on hold. Dollar bond issuance has halved and initial public offerings are down 75 percent this year, according to data compiled by Bloomberg.
The value of mergers and acquisitions in India has tripled this year from the same period in 2011, according to data compiled by Bloomberg. DLF Ltd. (DLFU), India’s biggest real estate company, which had 202 billion rupees ($3.6 billion) debt as of March, sold a unit to a rival, according to an exchange filing yesterday. The developer plans to raise as much as 70 billion rupees from sales in the next three years to reduce debt, DLF has said.
“Infrastructure and real-estate developers are among sectors with high debt levels,” Kapoor said. Faltering earnings growth will become a “trigger for consolidation.”
DLF, which has risen 19 percent this year, gained 3.5 percent to 217.7 rupees in Mumbai yesterday. Unitech Ltd., India’s second-largest developer, which has 55.3 billion rupees of debt, gained 2.1 percent to 21.5 rupees.
Indian companies raised $7.3 billion over 39 local acquisitions in 2012, compared with $2 billion through 54 such deals in the same period last year, data show.
The nation’s $1.8 trillion economy grew at a rate of 5.3 percent in the three months ended March, from a year earlier. Below-average rainfall is stoking farm prices and preventing the Reserve Bank of India from cutting borrowing costs.
The central bank kept its benchmark repurchase rate at 8 percent in the last review on July 31. Governor Duvvuri Subbarao said his focus was to control inflation which climbed 7.25 percent in June.
“The next few quarters are expected to be challenging for most corporates,” Krishna Kumar Karwa, managing director of Emkay Global Financial Services Ltd., told Bloomberg TV India on Aug. 13. “Even corporates that have announced very good results have been very cautious about their outlook for the next two to three quarters.”
June-quarter earnings for about 38 percent of companies on the Sensex have trailed analysts’ estimates so far, compared with 30 percent of the index companies that missed forecasts in the three months ended March, according to data compiled by Bloomberg.
Stock market issuance will remain difficult, Kapoor said as investors alter their risk appetite based on global cues and slowing domestic growth reduces India’s appeal.
“Volatility will be the order of the day for the next 6 to 9 months, with few windows of opportunities for issuers,” he said. Sellers of already listed stocks may manage to conduct block trades that do not need to go through a regulatory approval process like IPOs and take the least time to sell.
Companies including Reliance Communications Ltd. (RCOM) and Samvardhana Motherson Finance Ltd. have canceled or delayed at least $9 billion of stock offerings this year, as investors shunned the sales amid concerns over slowing growth.
Indian companies raised $4.3 billion selling global bonds this year, compared with $9 billion in the same period last year, data compiled by Bloomberg show. Unlike in equity markets where the slump is driven by a lack of demand, in the bond market the decline is driven by companies wary of locking in dollar- or euro-denominated debt while the rupee declines in value.
“The dollar bond market has been very liquid and available to issuers,” Kapoor said. “Volatility in recent global markets, credit spreads and the depreciation of the rupee has got corporates to think twice before they access it, particularly those that aren’t naturally hedged on revenues.”
Citigroup is ranked first in arranging equity sales, the data show. India’s rupee, which has weakened 4.3 percent this year, traded at 55.34 rupees to the U.S. dollar yesterday. If it returns to 48 rupees-per-dollar level, dollar bond activity will pick up, Kapoor said.
Companies that have acquired assets overseas and want to refinance their loans through long-term bonds could be the first to tap the markets, Kapoor said.
The nation’s corporates are facing $5.3 billion of maturing convertibles this year, and a decline in stock markets is forcing them to pay back debt. Suzlon Energy Ltd. (SUEL), India’s biggest wind turbine-maker, paid $360 million in July to redeem its U.S. dollar-denominated convertible bonds. The company borrowed $300 million from 11 lenders including State Bank of India, a person familiar with the matter told Bloomberg.
Foreign companies are still interested in takeovers in India because it remains one of the fastest-growing emerging economies, Kapoor said. Still, “valuation mismatches” are hampering dealmaking, he said.
“The consumption sector continues to see the most interest from foreign acquirers,” Kapoor said. “Even in a slowdown, consumer non-discretionary goods will continue to attract strategic investors.”
Citigroup was an adviser on the $1 billion sale of a stake in outsourcing company Genpact Ltd. (G) by General Atlantic LLC and Oak Hill Capital Partners LP. Bain Capital Partners LLC agreed to buy 30 percent of Genpact’s outstanding shares.
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