Citigroup Sees IPO Drought as Elections Cloud Policy

Citigroup Inc., the top adviser in India for share sales, sees no recovery in initial public offers from the worst start since 2009 until investors gain clarity on policies from a new government after elections.

Companies will probably wait and watch through the first half of this year before deciding on raising funds, Ravi Kapoor, the Mumbai-based head of corporate and investment banking at Citigroup, said in an interview without naming any firms. The bank, which topped league tables in 2013 with nine issues totaling 74.7 billion rupees ($1.2 billion), last helped State Bank of India in January with an additional share sale.

Companies are refraining from testing demand as surveys predict no clear majority for any political party, while the withdrawal of monetary stimulus by the U.S. Federal Reserve roils emerging markets. Share sales in the first two months of 2014 were the least in five years, according to data compiled by Bloomberg. There have been no IPOs exceeding $1 billion since October, 2010, when Coal India Ltd. raised 154.8 billion rupees.

“The pipeline across all banks for primary issuances is weak,” and a recovery is likely in the last quarter, Kapoor said last month at his office in Mumbai. “The reasons are volatility in emerging markets and weak macro-economic fundamentals as well as investors are waiting and watching for election results and the economic policy of the new government.”

Decade Low

The value of IPOs in India last year fell to a decade-low as political gridlock cooled economic growth to less than 5 percent starting in the quarter ended June 30, 2012, from an average 8.5 percent in the previous six years.

Money raised through IPOs has fallen to 549 million rupees so far this year, compared with 1.4 billion rupees in the year-earlier period, the data shows.

The biggest issue since Coal India was by Bharti Infratel Ltd., which raised 40.9 billion rupees in December 2012.

Intas Pharmaceuticals Ltd., an Indian drugmaker part owned by ChrysCapital Management Co., in November was considering scrapping plans for an IPO, three people with knowledge of the matter said at the time. The company’s Chief Financial Officer Jayesh Shah on Feb. 28 declined to comment on the IPO plans when reached by phone.

Potential offerings may also be getting postponed as companies and investors gauge the impact the Fed’s tapering of bond purchases would have on global currencies and equities.

Market Volatility

The spread between the CNX Nifty Index’s three-month implied volatility and the gauge’s actual price swings narrowed to 14.77 yesterday from 15.32 on Feb. 28, the highest level since at least October 2010, according to data compiled by Bloomberg. The gap, a measure of how much investors are paying to hedge, has widened from minus 6.2 in October.

The International Monetary Fund’s Managing Director Christine Lagarde said Feb. 23 that she sees continued market volatility stemming from tapering by the U.S. Federal Reserve.

That volatility has had an impact on the flow of funds to the Indian market, Kapoor said. Foreign investors bought $440 million more Indian stocks than they sold this year through March 3, compared with a net purchase of $8.4 billion in the same period in 2013, data compiled by Bloomberg show.

As Prime Minister Manmohan Singh failed to curb consumer inflation that averaged almost 10 percent starting 2012, the worst among Asia-Pacific economies, voters in India are counting on a new leadership to revive the $1.8 trillion economy and rein in prices.

Post Elections

Opinion polls before elections that must be held by May show Singh’s Congress party losing power. Surveys predict the main opposition Bharatiya Janata Party, led by Narendra Modi, will win 217 of 543 seats in the lower house of parliament, falling short of majority.

Primary markets may rebound after elections if there is a stable government with a strong economic policy, Kapoor said.

“Fundamentals won’t improve so rapidly,” he said. “People will start planning for fresh capital and new investments and then more flows will come into the market which will provide stability for the market.”

Citigroup was the top adviser in four of the past five years for domestic equity raising by Indian companies, according to data compiled by Bloomberg.

Emerging Markets

Emerging markets will experience the most IPOs in four years, Maria Pinelli, vice chair of strategic growth markets at Ernst & Young, said in February. Offerings from Chinese companies will lead the pick up, with “higher activity” from some countries in Asia including India, Pinelli said.

New regulations in India allowing companies to list directly on exchanges overseas without first listing domestically will encourage them to go abroad, Pinelli said.

Some investors expect demand to bounce back.

There is potential for better growth in India this year and if elections clear the uncertainty, there could be some immediate re-rating, Sukumar Rajah, managing director and chief investment officer, Asian equity at Franklin Templeton Investments, said in February.

“For India, almost everything that can go wrong has gone wrong, so therein lies the promise,” said Rajah.

The alternative assets arm of IDFC Ltd., India’s biggest financier of clean-energy projects, is considering raising funds for its wind unit Green Infra Ltd., Raja Parthasarathy, a partner at IDFC Alternatives, said by phone.

Debt Burdens

“An IPO is still a possibility,” said Parthasarathy. “Any option takes several months to come to fruition.”

Meanwhile, distressed companies will have to look at raising capital by paring assets, Kapoor said. Even when the IPO markets open “they will not see a dramatic change in sentiment, markets won’t suddenly open for them,” he said.

Ramky Infrastructure Ltd., an India builder of roads and water projects, plans to raise 9 billion rupees by selling stakes in its highway projects, Chairman A. Ayodhya Rami Reddy said Jan. 13.

Investment banks such as Citigroup are counting on a revival to also boost fees for IPOs.

In last year’s biggest IPO in the country, Just Dial Ltd., a search services provider, paid 3.4 percent of the proceeds as fees, data compiled by Bloomberg show. In the developed world, banks typically are paid about 7 percent of the amount raised.

“Everyone has seen a drought of IPOs,” said Kapoor. “And now they understand how important revenues and margins are to run their businesses, compensate their people and to give returns to their stakeholders. To my mind, there will be more discipline and less undercutting going ahead.”

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