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Our fundamentals are very strong, says Morgan Stanley

August 25, 2010 12:54 IST
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V K Bansal The fund flow from foreign institutional investors in Indian equity has grown over 50 per cent this year.

Morgan Stanley, the global investment bank that accounted for over six per cent of the Rs 62,400 crore (Rs 624 billion) raised through equity on Indian bourses this year, says FIIs have a distinct preference for India over other developing countries.

India Investment Banking chairman V K Bansal spoke to Abhineet Kumar on various issues related to equity capital markets.


At $11.3 billion (around Rs 51,980 crore ), the FII fund flow into the equity markets has increased over 50 per cent so far this year. What is the change in behaviour among FIIs that you have observed?

US investor interest has been substantial.

This includes the fact that investors who have not been active in India over the last one year are now participating and coming with size and scale.

One of the drivers is that they do not see growth in the US or Europe but in emerging markets, particularly in India. We have also seen a preference for India over China from certain investors.

US investors are clearly seeing India as a favourable destination and putting their money here.

How come there is preference for India over China?

While it continues to be an important market for international investors, many see China as a foreign trade-dominated economy.

In contrast, India is a domestic-focused economy. But the trend is that US FIIs are becoming more and more comfortable putting money into the Indian economy.

Our gross domestic product is currently estimated at $ 1.3 trillion (Rs 59.8 lakh crore). It is forecast to grow in excess of eight per cent for the current year.

The market capitalisation of listed Indian companies has been in the range of $1.2 -1.4 trillion in recent times, translating into a market capitalisation to GDP ratio of about one, which is considered a benchmark.

These are compelling signals that our markets are fundamentally very strong. Our infrastructure expense is more than 8.5 per cent and is moving up year-on-year.

Directionally, our fundamentals are very strong and compare very favourably with other leading emerging markets.

In addition, our 12 month forward PE (price to earning) multiple is less than 17.

Over the last 12 to 18 months, India has been among the top performing markets, so there is an inherent trust being built up. Our young population is also a very significant factor.

There are large issues lined up by both public and private sectors. Coal India alone plans to raise about Rs 15,000 crore in the largest-ever fund-raising by an Indian company. What impact it will have on the secondary market?

My view is that it will have a positive impact, because you get more trading, more volume. Take the example of NMDC.

Most of the money for the issue came from domestic investors but today you see there is a huge global interest at the right price in NMDC, because fundamentally the company is very strong and good.

It has a large market capitalisation.

I feel high-quality primary issues have a very good impact on the secondary market as the volume of trading moves up. I am not concerned about liquidity. More trading float is always good for the secondary market.

What kind of companies do you expect will come to raise funds this year?

From all high-growth sectors.

For example infrastructure, real estate and the financial sector, including banks. You will also see basic material groups, such as steel, cement and other raw material companies.

We are also seeing some new generation companies coming to raise funds.

The common theme here is that growth is coming from the domestic economy. So, any consumption-led company has more chance of raising funds.

What is your comment on fund-raising from foreign markets through American depository receipts, global depository receipts and foreign listing?

It is always selective. However, for many companies, qualified institutional placements can work best, as in India broadly the same FIIs can participate.

There are certain objectives that you can achieve if you are going for ADRs/GDRs. For instance, an ADR gets you access to US retail investors.

Branding is another factor, as is the fact that your ADR/GDR can help as a currency for acquisitions.

The government has been trying hard to attract retail investors, albeit with little success. Can you see the reason behind it?

As for most markets, retail investors tend to be momentum-driven and often invest on the back of the demand from institutional investors.

We have to see it in that context. Following the global financial crisis, retail investors have become very risk-averse.

They will participate, provided they see quality institutional interest. So, the Securities and Exchange Board guideline allowing retail investors to participate a day after the close of the issue is a welcome step.

Listing gains are also out. Is it also a deterrent for retail investors?

That's clearly a function of valuation. I think corporates have to understand that their real wealth is not at what price they issue shares but the value of what they are holding in the company after the issue.

Post issue, if the company's stock does not perform, then everyone is impacted.

Image: V K Bansal

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