N M Rothschild has been at the centre of global financial markets for over 200 years. Rothschild, which ranks among the world's largest privately owned banks, sees tremendous opportunity in small and mid-cap segment in India.
Richard Heald, Vice-Chairman and Amitabh Malhotra, Director of Rothschild spoke to Reena Zachariah and Rajesh Abraham about the volatile market, its implications and how this is an opportunity for Rothschild in India. Rothschild's independent and objective advice to the clients is as important in these challenging times as during a bull phase.
The markets are choppy. Do you think the meltdown will continue for some more time?
Heald: Markets are extremely volatile. There is clearly a tightening of liquidity in the international markets. The liquidity situation and the uncertainty in the financial services sector are having an impact on the ability of banks to fund acquisitions.
People will look at transactions in far greater detail than anytime in the past. There will also be an impact on the cost of capital. Such issues are common throughout the world.
How is this situation panning out in India?
Heald: The situation in India is less difficult because domestic banks are isolated or less affected by these problems.
Nevertheless, as the Finance Minister said on Monday, there was no financial decoupling. Therefore, problems in the US, Europe and Asia, to a certain extent, clearly have an impact in India.
Are IPO deals being affected by the ongoing market correction?
Heald: Corporates should be open to all financing options. Investors in general want to invest in cash generating assets and commodities rather than blue-sky projects. In the Indian context, private equity funds have surplus liquidity and have shown an increasing willingness to invest in equities.
One would thus expect the companies with delayed IPOs to tap the private equity investors by way of pre-IPOs/PIPEs. It may be better for some of these companies to go directly to private equity investors, generate cash flows and then to go public.
Is private equity an ideal arrangement? Can you give us some examples?
Heald: Allcargo Global Logistics and Havells India are two examples. These companies were looking at the qualified institutional placement route, but the market volatility compelled them to raise funds from private equity investors.
Cairn India did a $625 million placement on Monday. It was a quick and simple transaction. There is liquidity in the private equity market. Private equity investors put money into companies which meet their investment criteria. Moreover, they are willing to take minority positions and are capable of arriving at quick decisions.
What is your view on valuations? What is the feedback from corporates?
Amitabh: Valuations are not merely the function of entry valuations. Private equity investors look at valuations over a period of time as they do not buy and sell on a flip basis. A typical private equity fund's life is 7+ years and the exit timeframe is generally 3-5 years.
You need to see valuations on a historical five-ten year trend basis, through the crests and troughs. When investors exit, they need to know the end of the cycle they are likely to catch and the entry valuations.
What is your take on interest rates and inflation?
Heald: Rising commodity prices are worrisome. The inflationary pressures are a concern. However I'm extremely bullish about the Indian economy, both in relative and absolute terms.