Foreign funds likely to increase India weightage: Sunil Khaitan, BofAML

Bulge bracket funds from the US and Europe are expected to increase their weightage on India and more foreign funds are likely to hit the Indian equity markets, Bank of America Merrill Lynch said. Foreign institutional investors have already started to write big cheques for Indian equity deals said Sunil Khaitan, India head, Global Capital Markets, Bank of America Merrill Lynch, in an interview with ET. The interest for companies that straddle consumer growth and financing that growth is tremendous. The sector offers an interesting combination of payments, technology and consumer finance. Excerpts:

The fundraising market has been pretty good this year, except for IPOs. What are the reasons?
The IPO market is much better, if compared to 2018. But this year, the big ticket ones were probably missing. We believe the broader equity market is still very positive. The question is — what are the funds being raised for? Is it secondary monetisation or for balance sheet repair or growth equity? Some of these IPOs do fall in the growth equity discussion, but most have been equity sell-downs by sponsors. Given the weaker macro environment, monetisation has been the theme in the IPOs.

What kind of interest are you seeing from FPIs and DIIs?
The interest for companies that straddle consumer growth and financing of that growth is tremendous. The sector offers an interesting combination of payments, technology and consumer finance. One can hardly own anything in the listed payments sector in India because most companies are still in a nascent stage. There are a few unicorns and then a few startups. That is why any listings from the sector will attract a ton of interest from the market.

So you think there is no dearth of money coming into India?
The year 2019 started with people thinking that it could be a sluggish year, primarily due to the scheduled Lok Sabha elections. Still, so many good deals happened between February and May. There was a lot of speculation in the market around who would form the next government and if it would be a stable one. Going forward, we continue to see a strong pipeline. Good companies will continue to see investor interest — both from foreign and domestic institutional investors.

With the kind of liquidity environment, what kind of action is happening on the NBFC front — a few QIPs?
The NBFC sector definitely needs to come to the market in the near future to raise funds. But these companies first need to get their balance sheets in shape and then come to the market for growth capital. This could take some time. However, the market will find it a lot more digestible.

What’s your take on government issues — disinvestments? Will any large institution express interest for this?
Institutional investors would always show interest in government disinvestment but that depends on the name one is talking about. Some of the bellwether names in Indian indices are PSUs and there would definitely be a lot of interest if the transaction is structured well. What we are seeing now is that some of the largest US funds are ready to write big ticket cheques and such players would be happy to buy well-run PSUs. Over the last few months, we are getting a sense that such big funds are willing to enter India again and deploy capital in size.

What could have triggered their sudden interest in India?
In our discussions, we have realised that foreigners like a government which takes tough decisions, which might be unpopular in the near term, but have a long term positive. That is why, FPIs like this government. A few fund managers even told us that they see that the rule of law was getting better, the economy getting more formalised and a difficult but necessary reform thing like GST has eventually happened. And now that the short term pain of the reforms is getting priced in, such big funds would increase their India weightage and it means more funds coming into the country.

All this change in perceptions has happened in the last six months, you reckon?
It has been a process and markets like continuity and stability. A stable mandate for the next five years paves the way for investors to deploy cash. The last 6-8 months was also the time when we brought some quality deals to the market. For a fund, which actually puts say $100 million in India, it doesn’t have much to own in real estate. And then suddenly, when Embassy REIT hits the market, that fund would just buy as much as it can.

Do you think the share of India weightage will go up by 2020 for all these global funds?
One round of increasing in weightage has already happened and not all of that capital has come in yet because once you have taken the weight higher, you can’t really deploy all of that capital immediately. The reason being the names that FIIs are interested in might be trading at demanding valuations already. Therefore, the allocation doesn’t really happen at one go and that’s why when there’s a deal, suddenly people think it’s a good time to buy because they can get a certain volume at one go.

The budget promised to bring down the promoter holding to 65%. Will that help in creating the depth for Indian stocks?
Globally, the limits of free float are 25% in key countries but no developed market mandates 35% free float requirement. If the 35% free float threshold is made mandatory, the market needs at least $40-45 billion of new capital, whether from mutual funds or FIIs. The way our deals are typically structured, 60-70% of this corpus needs to be FII money. It means we need FIIs to invest another $30-35 billion dollars into India. Ideally, there should not be a large discrepancy between free-float levels for government-owned firms and the private sector.