Beruflich Dokumente
Kultur Dokumente
Report
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
on
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
thorough understanding and guidance provided by a well known research firm. To address such needs CARE Research offers need-based solutions by completely checking the facts, market scenario, past trends, etc to help you realise your futuristic goals and transform your businesses. Customised Research involves business analysis and position in the market, financial analysis, and future outlook etc. It helps the clients to make better credit / investment decisions Industry Research: CARE Research is a leading provider of value research. Investors, bankers, analyst, etc use CARE Research sector reports for in-depth understanding of present situation, issues, outlook etc to arrive at opinion. The reports contain high quality data, trends, opinions and outlook. Further CARE Research also provides updates on quarterly /half-yearly review of issues/environment, updated information about the significant changes that occurred during the period along with review of outlook on the respective sectors. The services are today subscribed by vast number of clients. CARE Equi-Grade: It is an independent research on equities which would delve upon critical aspects like the fundamentals of the company and the valuation of its equity as analytically reviewed by CARE. CARE Equi-Grade would enable investors to make more informed decisions through its independent analysis and assessment.
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
2011
DISCLAIMER ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF. This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Research operates independently of ratings division and this report does not contain any confidential information obtained by ratings division, which they may have obtained in the regular course of operations. The opinion expressed in this report cannot be compared to the rating assigned to the company within this industry by the ratings division. The opinion expressed is also not a recommendation to buy, sell or hold an instrument. CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this product. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE Research.
Published by Credit Analysis & REsearch Ltd. 4 Floor Godrej Coliseum, Off Eastern Express Highway, Somaiya Hospital Road, Sion (East), Mumbai 400 022
th
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Table of Contents
Executive Summary ........................................................................................................................................ 6 Initial Public Offering (IPO) Market ............................................................................................................. 6 Mergers & Acquisitions (M&A) ................................................................................................................... 6 Private Equity (PE) & Venture Capital (VC) Market .................................................................................... 7 Challenges ................................................................................................................................................... 8 Introduction ................................................................................................................................................... 10 Initial Public Offering Market....................................................................................................................... 11 Background ............................................................................................................................................... 11 Table 1: Capital Raised Through IPOs (FY94-FY11) ................................................................................... 12 Table 2: Sector-wise break-up of Capital Mobilised through Public and Rights Issues ............................ 12 Chart 1: IPO Quarterly Capital Raised and Issuances ............................................................................. 13 Outlook ..................................................................................................................................................... 13 Chart 2: Number of draft offer documents filed with SEBI ...................................................................... 14 Table 3: Break-up of Capital Mobilised through Private and Public Issues .............................................. 14 Table 4: Sector-wise break-up of Capital Mobilised through Public and Rights Issues ............................ 15 Mergers & Acquisitions Market ................................................................................................................... 16 Current Trends and Outlook ..................................................................................................................... 16
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF. Chart 2: Indian M&A Activity .................................................................................................................... 16
Table 5: Break-up of M&A Activity ........................................................................................................... 17 Table 6: M&A Average value per deal ($ million) .................................................................................. 18 Table 7: Sector Breakup of M&A Deal Value (%) ...................................................................................... 18 Private Equity & Venture Capital Market..................................................................................................... 19 Background ............................................................................................................................................... 19 Chart 3: Evolution of Venture Capital Funds in India................................................................................ 19 Chart 4: PE/VC Activity in India ................................................................................................................. 20 Chart 5: Average Deal Size for PE/VC Activity in India .............................................................................. 21 Chart 6: Sectoral Distribution of PE Investments (2010) .......................................................................... 22 Challenges ..................................................................................................................................................... 23 Table 8: Subscription Details for Selected Issues...................................................................................... 24 Table 9: Historic Trading Details at BSE and NSE ...................................................................................... 25 Table 10: Price Performance of IPOs ........................................................................................................ 26
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
After the hiatus, the financial markets are back with a bang. The benchmark indices like Sensex and Nifty are inching up and are at the highest levels witnessed in the last two years. According to CARE Research, the strong domestic demand, fiscal stimulus packages of the Government and proactive actions of the Reserve Bank of India has led to a sharp revival of the Indian economy. The various segments of the Indian financial markets have witnessed resurgence, including the Initial Public Offer (IPO) market, Merger and Acquisition (M&A) market and the Private Equity/Venture Capital (PE/VC) market. The investment banking industry that saw a lacklustre period in 2008 and 2009 is back in
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
business. The potential opportunity offered by Indian consumers and the infrastructure sector is acknowledged by the global investors, who are willing to pour loads of money into India. The domestic investors too are enthused by the Indian growth story. While investors across the globe are in search of new investment avenues in India, the promoters are looking forward to raise money through PE/VC either for expansions/starting new ventures or for en-cashing their investments by reducing their stake. On the back of the buoyant domestic demand, companies are planning expansions and thus CARE Research believes that there is significant need for funds and thus many PE deals would come up in the near future. With soaring equity markets and healthy investor appetite, private placement of shares is increasing. CARE Research expects the deal pipeline for the investment banking industry to remain robust in the next 1 2 years. Thus, after a brief pause, the investment banking industry is back in business.
Tolkien, J. R. R. (1954), The Fellowship of the Ring, The Lord of the Rings
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Executive Summary
Initial Public Offering (IPO) Market
IPO activities rebound in FY11 driven by public sector institutions: The recent data showcases revival of the IPO market. As many as 52 IPOs hit the market, raising a total fund to tune of about 35,876 crore in FY11.CARE Research expects the IPO pipeline to remain robust on account of (a) aggressive disinvestment plan by the Government of India (GoI) to raise up to Rs.40,000 crore by FY2012 and (b) volume of draft offer documents filed with SEBI has seen substantial recovery in since FY11. Furthermore, as per the recent government mandate, all listed profitable Public Sector Units (PSUs) should have a minimum public holding of 10% and all unlisted profitable PSUs should be listed while retaining a minimum 51% stake and management control with the government. According to CARE Research, this mandate along with the divestment plan is likely to substantially increase the share of public sector institutions in the primary market.
markets like India. However, M&A activity dipped sharply during the 2007-09 period on the back of global economic slowdown and liquidity crisis. However, on the back of global economic revival and ease in the liquidity situation coupled with financial markets also recovering, the M&A space is also likely to demonstrate gradual recovery. Furthermore, the M&A data-points for 2010 are showing signs of renewed optimism. In CY2010 M&A activities almost reached its CY2007 peak levels in terms of volumes and value. Outbound and cross-border deals to revive: In the past, India has been net acquirer with total value of outbound deals exceeding the total value of inbound deals by a wide margin. However, the trend was momentarily reversed in 2009 when the global economic slowdown prompted Indian corporate houses to adopt a more cautious approach towards overseas acquisitions and focus on relatively safe domestic deals. However, the recent M&A data for CY2010 are
indicating resurgence of cross-border and inbound deals in value terms. The total value of crossborder deals for CY2010 stood at about $31.4 billion, 71% higher than that of domestic deals. Additionally, domestic deals have contributed close to 56% of the total deal volume for CY2010.
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
M&A activities to heighten across sectors: In 2007, telecom and metals/mining sectors dominated the Indian M&A space primarily due to the several billion-dollar deals in those sectors. While telecom continues to be one of the preferred sectors for M&A activities in India, some of the other sectors, witnessing lot of activities in terms of value, are pharma/healthcare and banking/Financial Institutions (FIs). Going forward, CARE Research expects M&A activities to pick-up in emerging sectors such as IT/ITeS, telecom, pharmaceuticals and biotech. Furthermore, the economic recovery is likely to push consolidations in the mature sectors such as metal/mining, oil and gas and textiles resulting in M&A activities in these sectors as well.
Banking (microfinance), education/healthcare, infrastructure and construction sectors to see substantial investment going forward: Historically, banking/FIs and energy and consumer products have been the preferred sectors of investors. However, going forward, we are expecting investors to diversify to banking (microfinance), education/healthcare, infrastructure and construction sectors. CARE Research believes that the Governments initiatives on social spending provide huge growth opportunities for investors to invest in the companies exposed to these emerging sectors. Furthermore, the global economic recovery is likely to increase attractiveness of emerging markets like India for investment purpose.
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Challenges
Lack of disclosures and transparency: In India, the disclosure and transparency requirement in several capital market transactions such as M&A, PE or VC has been hazy. This information asymmetry raises concerns over fundamentals of the firm and consecutively increases the expected return from its securities. In the opinion of CARE Research, the above issue can be addressed by two ways. Firstly, the regulator can prepare a standardized reporting format wherein critical information about the deal is disclosed by the companies. Furthermore, after the deal is concluded, the parties involved in the transaction should be mandated to furnish detailed financial statements for at least a few quarters on a standalone and consolidated basis. Secondly, the participating companies and facilitating agency (such as merchant bankers) may voluntarily disclose critical facts about the deal in the public place which is not mandated by regulations.
Increasing retail participation remains a challenge for primary as well as secondary market: The retail participation in the IPO market has been lukewarm with major issues struggling to get their full 35% retail subscription. In order to address the issue SEBI has proposed increasing cap on retail investment in public issue from the existing Rs.1,00,000 to Rs.2,00,000. CARE Research believes that the above proposal, even if approved would not help large-sized public issue (issue
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
size of Rs.4,000-6,000 crore) in getting full 35% retail subscription. For instance, even under the most optimistic scenario of about 65,000 applications with an average application size of Rs.1,65,000 would not be able to support an issue size larger than Rs.3,000 crore.
The situation is no different in the secondary market, with merely 7.80% of the total domestic household savings going to mutual funds investment. The primary reason attributed to this is the lack of in-depth analytical information and independent professional assessment of company fundamentals and its valuation. For example, out of total 5,000 listed companies, active research coverage is available for only about 200 companies. This has resulted in retail investors restricting themselves to bigger companies ignoring many small but fundamentally sound companies with attractive valuations. For example, non-institutional ownership in SENSEX (large-cap) is about 40 % of free-float (FF), whereas non-institutional ownership in BSE-500 (excluding Sensex, predominantly mid and small caps) is only about 18 % of FF. This poses a pressing need for independent research houses as it could provide more visibility to fundamentals of various companies, thereby shielding retail investors from any speculative activities.
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Lack of robust infrastructure: In the last few years, infrastructure and regulations pertaining to the secondary market have almost reached global standards. However, similar kind of infrastructural development in the primary market is absent given the oscillating nature of the business. The outsourcing of post-issue labour intensive tasks to third-party agencies, lacking proper processes or infrastructure, may hamper the issuance process.
Mispricing of IPOs: As per a survey conducted by Associated Chambers of Commerce and Industry of India (ASSOCHAM), majority of CEOs and CFOs attributed the lukewarm response to IPOs to bad pricing and weak market sentiments. CARE Research has studied price performance of about 74 IPOs issued between FY09 FY11 period. The analysis revealed that about 60% IPOs are currently trading lower than the lower IPO price band, whereas about 35% are currently trading higher than the upper IPO price band. The extent of mispricing is somewhat abated in IPOs issued in 2009 and 2010, with majority of IPOs outperforming their initial pricing. However, price performance of newly listed IPOs remains to be seen over the next 2-3 years, as the current outperformance may be an offshoot of the ongoing buoyancy in secondary market.
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Introduction
The Indian capital market has come a long way since last two decades after the economic reforms in 1992. The infamous stock market scam in which funds from banking transactions were illegally diverted to artificially inflate stock prices triggered a series of reforms in both primary and secondary markets. The most notable amongst these was the abolition of the Controller of Capital Issues (CCI) and the subsequent creation of the Securities and Exchanges Board of India (SEBI). Prior to 1992, CCI had full control on the pricing of capital issues in India. CCI used to arrive at the fair issue price by using accounting information leading to under-priced issues in many cases. This led to companies shying away from going public and relied heavily on debt as a source of funding. However, the CCI was abolished in 1992 and consecutively the regulatory control on the pricing of new issues was removed. Accordingly, companies turned to capital markets and consecutively reduced their dependence on debt as a source of funding. However, the free pricing regime resulted in over-pricing of capital issues and large preferential allotment of shares. Realizing the need to regulate the market and ensure adequate disclosure, SEBI took up the role of capital market regulator in late-1992. SEBI was delegated with the powers to monitor and regulate stock exchanges, their members, the companies (listed or willing to list on the exchanges), stock brokers, portfolio managers, merchant bankers, intermediaries and other participants of stock markets.
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
The secondary markets saw a similar extent of reforms. Stringent regulations relating to stock exchanges, capital adequacy, diversity of ownership of exchanges and insider trading was formulated. The most commendable of these secondary market reforms were SEBIs initiative in 1993 to shift all exchanges from open-outcry to screen-based trading. Additionally, prior to 1994, Indias secondary stock market was dominated by the Bombay Stock Exchange (BSE) located in Mumbai and participants from other parts of the country were unable to participate in price discovery. This led to wide disparity in prices in markets outside Mumbai and inside Mumbai, resulting in arbitrage opportunities. In this light, the National Stock Exchange (NSE) was established with its trading network spanning across the country. These structural changes in the Indian capital market changed the facet of the business.
10
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
11
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Year
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
No
Table 2: Sector-wise break-up of Capital Mobilised through Public and Rights Issues
Banking/FI's Cement & Construction Power Entertainment Healthcare Information Technology Others Total FY06 48.4 3.7 7.9 2.6 2.4 3.3 31.7 100.0 FY07 14.8 8.2 0.1 3.6 0.6 6.2 66.5 100.0 FY08 37.6 21.7 15.8 0.5 0.6 0.8 23 100.0 FY09 12.1 0.5 5.9 7.1 0.9 0.3 73.2 100.0 FY10 8.6 4.8 43.9 4.3 1.8 0.9 35.7 100.0 FY11 25.5 4.2 14.0 1.1 0.4 0.2 54.6 100.0
Source: CARE Research and SEBI However, the Indian IPO market witnessed a considerable decline in the year 2009, owing to the global economic slowdown. IPO statistics has been worst in terms of both volume of issues and amount raised. In February 2008, three large IPO offerings namely Wockhardt Hospitals Ltd.,
12
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Emaar MGF and SVEC Constructions were shelved due to weak investor sentiment. As per a survey conducted by ASSOCHAM, majority of CEOs and CFOs attributed the lukewarm response to bad pricing of the issues and weak market sentiments. The IPO activities almost dried up in Q3 and Q4 of FY09 with merely two IPO issues totalling Rs.50 crores.
14,000 12,000
20
10,000
8,000 6,000
15
10 5 0
Q1FY08 Q3FY09 Q1FY11 Q2FY11
4,000
2,000 0
Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q3FY11 Q4FY11
Amount
Volume (RHS)
Outlook
IPO activity rebounds in FY11; trend to persist in next few quarters The recent data-points demonstrate renewed interest in the IPO market by the companies. As many as 52 IPOs hit the market, raising a total fund in tune of about 35,876 crore in FY11. Going forward, CARE Research expects the IPO pipeline to remain robust on two counts. Firstly, the central government has chalked out an aggressive divestment plan, with a target to rise up to Rs.40,000 crore through disinvestments in FY11. As per the recent criteria set by the Cabinet, all listed profitable PSUs should have a minimum public holding of 10% and all unlisted profitable PSUs should be listed while retaining a minimum 51% stake and management control with the government. The above decision would make as many as 60 PSUs suitable for disinvestment. Secondly, the volume of draft offer documents filed with SEBI has seen a substantial recovery in FY12. Although the number is not as high as in the FY06-08 period, the broad trend signifies
Number of issuances
13
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
25
healthy pipeline of IPOs. The above two factors along with stabilizing secondary market is likely to make IPO, an attractive option to raise money in 2011.
45 40
35 30 25 20
43
39 32 25 27
37 31 24 21 15 14 10 4 10 20
15
10 5 0
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Source: CARE Research and SEBI Public sector offering to support the primary markets
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
Historically, private sector has dominated the primary market, both in terms of amount raised and the number of deals. However, the public issues are comparatively larger in size but fewer in number. Going forward, we expect funds mobilized from the private sector to give more visibility to the primary market. Nevertheless, with a number of PSUs aiming for divestment, the public sector is likely to dominate the IPO market in the next few months.
No
Q1FY12
Q1FY09
Q2FY10
14
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Traditional sectors continuing to show major capital raising activities Banking/finance, cement/construction and energy/power have been the most active sectors in the IPO market. Although entertainment has also emerged recently, the three traditional sectors have been driving the capital raising activities in India.
Table 4: Sector-wise break-up of Capital Mobilised through Public and Rights Issues
Banking/FI's Cement & Construction Power Entertainment Healthcare Information Technology Others Total FY06 48.4 3.7 7.9 2.6 2.4 3.3 31.7 100.0 FY07 14.8 8.2 0.1 3.6 0.6 6.2 66.5 100.0 FY08 37.6 21.7 15.8 0.5 0.6 0.8 23 100.0 FY09 12.1 0.5 5.9 7.1 0.9 0.3 73.2 100.0 FY10 8.6 4.8 43.9 4.3 1.8 0.9 35.7 100.0 FY11 25.5 4.2 14.0 1.1 0.4 0.2 54.6 100.0
15
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
600 500
30 20
20 16 12
400
300 200
10
0 2005 2006 2007 2008 2009 2010
100
0 2005 2006 2007 2008 2009 2010
Source: CARE Research and Industry Outbound and cross-border deals to revive In the past, India has been net acquirer with the total value of outbound deals (Indian companies acquiring overseas companies) exceeding the total value of inbound deals (foreign companies acquiring Indian companies) by a wide margin. Furthermore, cross-border deals (outbound + inbound) have outpaced domestic deals in value terms. However, the trend was momentarily reversed in 2009 when the global economic slowdown prompted Indian corporate houses to adopt
16
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
a more cautious approach towards overseas acquisitions and focus on relatively safe domestic deals. Consecutively, domestic deals dominated cross-border deals in value terms for the first time in the five-year period. Similarly, the value of inbound M&A deals totalled at $3.9 billion, almost three times that of outbound deals. However, the recent M&A data for 2010 are indicating a resurgence of cross-border and inbound deals in value terms. The total value of cross-border deals for 2010 stood at about $31.5 billion, 71% higher than that of domestic deals. Additionally, domestic deals have contributed close to 56% of the total deal volume for 2010.
Source: CARE Research and Industry The adjusted deal size to moderate In 2007 and 2008, the size of M&A deals averaged $70-75 million, with outbound deals being executed at a substantial premium to domestic deals. The average size dropped to merely $36
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
million in 2009, possibly due to investors preference for smaller deals in order to reduce their risk exposure. However, 2010, the average size of the deal shot up to close to $75 million per deal. CARE Research notes that this does not necessarily signify a structural shift to higher value M&A deals, as the year 2010 was marked with seven deals executed at a value exceeding $1.0 billion each. After adjusting for the $10.7 billion Bharti Airtel/Zain Africa deal, the average deal size comes down to a moderate level of about $48 million. (The $11 billion GTL/Reliance Infratel deal was called off in September 2010)
17
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Source: CARE Research and Industry M&A activities to heighten across sectors In 2007, telecom and metals/mining sectors dominated the Indian M&A space together contributing close to 66% to the overall deal value. This was primarily attributed to several billion-dollar deals in telecom (Vodafone/Hutch-$10.83 billion) and metal/mining (Tata/Corus$12.2 billion, Hindalco/Novelis-$6.0 billion and Essar/Algoma-$1.6 billion) sectors. Telecom continues to be one of the preferred sectors for M&A activities in India, contributing close to 50% of the total deal value in 2010. Some of the other sectors, witnessing lot of activities in terms of value, are pharma/healthcare and banking/FIs. Going forward, we are expecting M&A activities to pick-up in emerging sectors such as IT/ITeS, telecom, pharmaceuticals and biotech. Furthermore,
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
the economic recovery is likely to push consolidations in the mature sectors such as metal/mining, oil and gas and textiles resulting in M&A activities in these sectors as well.
18
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
ISIEmergingMarketsPDF
Number of VC funds
2002
2003
2004
2005
2007
2008
2009
Source: CARE Research and SEBI The PE/VC industry experienced the first wave of rapid growth in late-1990s when capital-starved Information Technology (IT) and telecom companies started receiving huge investments from foreign venture capital funds. However the dot-com bubble burst pushed many PE/VC companies into losses, especially those who were heavily exposed to start-ups/early stage dot-com companies. As a result, PE/VC activities declined severely in 2001-03 period.
2010
2001
2006
19
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
The industry showed signs of recovery by end of 2004. PE investors started investing heavily in Indian markets. However, the investments were more focused on late-stage companies and sector diversification. The industry witnessed phenomenal growth rates in the 2005-07 period, when FIIs, attracted by growth prospects of Indian economy and as a matter of diversification, invested substantially in Indian markets. The year 2007 saw peak PE/VC activity numbers both in terms of volume of deals and total value of the deals.
400 350
300
250 200
150
100 50
Value of Deals
Number of Deals
Average deal size expected to further go down Indian PE/VC market saw highest activity in 2007 with a total capital infusion of about Rs.76,500 crore (~$17 billion) from 365 deals. Consecutively, the average deal size also peaked to about Rs.210 crore per deal. However, PE/VC volumes in 2008 and 2009 started witnessing shrinkage in the average deal size as market participants preferred lower or middle-market transactions, possibly due to the global economic slowdown. The average deal value in 2008 and 2009 was about 29% and 48% lower than 2007 levels respectively. Going forward, we are expecting investors to show more appetite for lower to middle-market deals in order to mitigate risk, thereby further depressing the average deal size.
Number of Deals
20
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
200
148
150
105
113
110 112
100 50 0
2004
19
2000
68 38 34 38
2007
Source: CARE Research and Industry Banking (microfinance), education/healthcare, infrastructure and construction sectors to see substantial investment going forward Historically, banking/FIs, energy and consumer products have been the preferred sectors of investors. However, going forward, we are expecting investors to diversify to banking (microfinance), education/healthcare, infrastructure and construction sectors. We believe that the
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
Governments initiatives on social spending provide huge growth opportunities for investors to invest in the companies exposed to these emerging sectors. Furthermore, the global economic recovery is likely to increase attractiveness of emerging markets like India for investment purpose.
2010
2001
2002
2003
2005
2006
2008
2009
21
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
15.0% 25.0% 3.0% 3.0% 3.0% 3.0% 4.0% 5.0% 6.0% 8.0% 10.0% 15.0%
Telecom
IT&ITES Pharma Healthcare &Biotech FMCG, Food & Beverages Education Manufacturing
Cement
Source: IBEF
22
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Challenges
Lack of disclosures and transparency In India, the disclosure and transparency requirement in several capital market transactions such as M&A, PE or VC has been hazy. Information disclosed by the involved parties is often inadequate for investors to make informed decisions. This information asymmetry raises concerns over fundamentals of the firm and the expected return from its securities. By providing adequate disclosures and information, the firm can convince investors to accept a lower rate of return, thereby reducing its cost of capital.
The above issue can be addressed by two ways. Firstly, the regulator can prepare a standardized reporting format wherein critical information about the deal is disclosed by the companies. Furthermore, after the deal is concluded, the parties involved in the transaction should be mandated to furnish detailed financial statements for at least a few quarters on a standalone and consolidated basis. This would help investors in evaluating performance of each of the businesses and associated synergies. It may be noted that a similar disclosure requirement already existing for companies raising capital from the primary market through IPOs wherein critical facts and associated risk factors are enumerated by the issuing companies. Secondly, the participating
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
companies and facilitating agency (such as merchant bankers) may voluntarily disclose critical facts about the deal in public place which is not mandated by regulations. Increasing retail participation remains a challenge for primary as well as secondary market Primary market: SEBI has recently proposed increasing the cap on retail investment in public issue from the existing Rs.1,00,000 to Rs.2,00,000, in order to attract more retail investors in the primary market. The proposal is based on two observations made by SEBI from recent public offerings. (a) 75% of applications in the retail investor category falls in Rs.80,000-1,00,000 band, whereas applications lower than Rs.5,00,000 size in the non-institutional investor category is negligible. (b) Number of applications received in retail investor category ranges between 35,000 to 70,000. CARE Research believes that the above proposal, even if approved would not help large-sized public issue (issue size of Rs.4,000-6,000 crore) in getting full 35% retail subscription. For instance, even under the most optimistic scenario of about 65,000 applications with an average
23
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
application size of Rs.1,65,000 would not be able to support an issue size larger than Rs.3,000 crore.
NMDC NTPC REC Standard Chartered Jaypee Infratech SKS Microfinance DB Reality SJVN
Source: CARE Research and Industry Secondary Market: Participation of retail investors in Indian equity markets is limited. For instance, the share of mutual funds in the total domestic household savings stands at about 7.80% (as on FY08), significantly lower than that of US at about 45%. Furthermore, Out of the total 188 million
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
investors holding financial assets, only eight million have exposure in debt and equity markets, either directly or indirectly. The primary reason attributed to this is the lack of in-depth analytical information and independent professional assessment of company fundamentals and its valuation. For example, out of total 5,000 listed companies, active research coverage is available for only about 200 companies. This has resulted in retail investors restricting themselves to bigger companies - many small but fundamentally sound companies with attractive valuations get ignored due to the lack of information or visibility. For example, non-institutional ownership in SENSEX (large-cap) is about 40 % of free-float (FF), whereas non-institutional ownership in BSE-500 (excluding Sensex, predominantly mid and small caps) is only about 18 % of FF. This poses a pressing need for independent research houses as it could provide more visibility to fundamentals of various companies, thereby shielding retail investors from any speculative activities.
24
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Lack of robust infrastructure In the last few years, infrastructure and regulations pertaining to the secondary market have almost reached global standards. However, a similar kind of infrastructural development in the primary market is absent given the oscillating nature of the business. Any additional capacity built-in by registrars would remain idled in case issues are relatively few or small. Similarly, registrars with low capacities would struggle to conclude deal proceedings within the prescribed time-frame.
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
Registrars of the issue typically subcontract the post-issue labour intensive job such as data entry work to outside agencies. Although data entry work seems to be relatively easy and straightforward, it is crucial in ensuring successful completion of the issue process. These data-entry agencies may not have strong processes or the necessary technological infrastructure to ensure seamless completion of the work. Furthermore, their services are also available at a relatively cheaper rate, which may tempt registrars to select them for the work. The chance of erroneous data entry increases greatly in case of large issues involving thousands of applications. Mispricing of IPOs As per a survey conducted by ASSOCHAM, majority of CEOs and CFOs attributed the lukewarm response to IPOs to bad pricing and weak market sentiments. CARE Research has studied price performance of about 74 IPOs issued between FY09-FY11 period. The analysis revealed that about 60% IPOs are currently trading lower than the lower IPO price band, whereas about 35% are currently trading higher than the upper IPO price band. The IPO mispricing was prevalent in 2007 and 2008 with about 75% of the issues being overpriced. The mispricing has somehow abated in IPOs issued in 2009 and 2010, with the majority of IPOs outperforming their initial
25
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
pricing. However, the price performance of newly-listed IPOs remains to be seen over the next 23 years as the current outperformance may be an offshoot of the ongoing buoyancy in the secondary market.
Year
Contact
26
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
revati.kasture@careratings.com
divyesh.shah@careratings.com
kunal.maheshwari@careratings.com
Website: www.careratings.com
ISIEmergingMarketsPDF in-mdidemo from 115.111.95.19 on 2011-07-07 16:20:08 EDT. DownloadPDF.
Email: careresearch@careratings.com
All Rights Reserved. No part of this report may be reproduced or transmitted in any form without prior written permission from CARE DISCLAIMER This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Research operates independently of ratings division and this report does not contain any confidential information obtained by ratings division, which they may have obtained in the regular course of operations. The opinion expressed in this report cannot be compared to the rating assigned to the company within this industry by the ratings division. The opinion expressed is also not a recommendation to buy, sell or hold an instrument. CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this product. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE Research.
27
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
28
Downloaded by in-mdidemo from 115.111.95.19 at 2011-07-07 16:20:08 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.