'Valuation is key to success of divestment'

Six weeks ago, Ravi Kapoor was appointed as head of global banking at Citi India. In his first interview after taking over his new responsibility, Kapoor tells Business Standard that the success of the Centre's divestment programme hinges on attractive valuations. But he refuses to discuss the fee paid to bankers, which, rivals say, has been driven down by Citi. Excerpts:

Mergers and acquisitions seem to be back. Will the problems in Europe affect deals?
The sovereign debt crisis in Europe does not seem to be over yet but, large as it is, it is capable of being ring-fenced.

Indeed, M&A appetite, both outbound and inbound, is back. The outbound M&A appetite is demonstrated by some recent deals like Bharti-Zain. Though cautious, corporate India wants to grow through outbound M&As and is finding valuations attractive.

Indian businesses are generating cash and the strength of balance sheets is increasing, which is motivating them to look at acquisition opportunities offshore. In a few cases, access to raw material and hedge from rising raw material prices is driving outbound M&As and consequently, we have witnessed acquisitions of mines in countries like Australia, Indonesia, South Africa and the US.

But how many companies would have cash to pursue such deals?
It is not necessary to have cash. More important is the ability to raise cash.

While there are lots of companies that have free cash flows from operations, there are others who have the ability to raise cash either from the equity market or from the bank market. If their track record is good, banks and markets will support them when they go out to acquire.

What about inbound deals?
Inbound M&As, too, are picking up. The fact is that a lot of capital is available globally which is not finding growth opportunities.

This capital is expected to come to markets like India and China where there is growth and value accretion opportunity. Over time, I see acceleration in foreign direct investments and strategic capital into India.

Inbound M&A activity has been more driven by specific opportunities than sectors. For instance, the infrastructure sector presents a huge opportunity but foreign companies have not been big participants in this sector.

Foreign companies are keen to consolidate their holdings in Indian subsidiaries through open offers and/or entering through buyout of businesses or minority stakes in specific opportunities and not specific sectors.

What is your outlook on portfolio flows?
Portfolio flows and markets should be upward sloping.

However, due to international news flows, there will continue to be intermittent volatility, making some investors risk-averse, and result in temporary outflow of liquidity.

How do you look at the recent government rule on 25 per cent public float?
From a macro point of view, this is a step in the right direction as it will make Indian markets more liquid and deep. It will also help discover fair price.

Also, a large floating stock will attract large investors. At the micro level, there could be issues like new companies raising more capital than is needed or existing shareholders selling holdings without need for cash to comply with the rule.

The exclusion of American Depository Receipts and Global Depository Receipts needs to be relooked at as these are backed by fungible shares and hence can add to the domestic free float.

Does this mean that for you more business is in public issues than M&As?
The regulators have given time for implementation of the new rules by selling five per cent a year. So, business should be more spread out.

Do you expect any changes in the fee structure?
I don't expect any change in the fee structure due to the new rules.

What is your assessment of things on the debt side?
There is ample liquidity right now and therefore no immediate pressure on interest rates.

However, interest rates are bound to go up in the next three to six months and inflation could be one of the drivers.

However, unlike last year, this year, the foreign bank credit market and the foreign bond market have opened up, giving Indian companies access to an alternative debt capital market.

The government plans to raise Rs 40,000 crore (Rs 400 billion) this year. Do you think the markets have the appetite for so many issues?
I don't think market capacity is an issue. In 2007, over Rs 1,00,000 crore (Rs 1000 billion) was raised from the market.

Considering that, the government divestment of Rs 40,000 crore (Rs 400 billion) should not disturb the markets. Attractive valuations from the investor's standpoint would be the key to success.