Vallabh Bhansali of ENAM Securities says that the year 2006 may see some cautious optimism in the primary market and one can expect more market reforms from the government.
He adds that if the market weakens, there might be some trouble in the primary market. He also says that one would see a fair number of issues if the markets remain flat.
He feels that the prospects for the primary market are decent and the market valuations are at more fair levels. He further states that the markets need a time-wise correction, rather than a price-wise correction.
Excerpts from CNBC - TV18's exclusive interview with Vallabh Bhansali:
Do you think we will see a very different primary market this year, for the remaining part of the year?
I think it would definitely be different. Last year we started with a steady market and the market rose to great highs, so did the primary market issuance. This year we are starting with the Reliance issue and then there is a lot of caution in the market. So I think it will be a very good year for the primary market because we will have caution and we will have cautious optimism. I always liked that.
One quick word on what the government is taking up today in terms of Nalco? Do you think it is realistic to expect some thing to happen there and how would the market take up a possibility of a public offer in either of these two companies?
I really wouldn't want to guess what would happen, but I only have some history to go by. Once the election season is over and the government enters the second phase of their governance, I expect that there would be more market reforms, which generally happens in this period. In that sense, we can hope for something, but I don't want to guess.
What is it that you expect to see in the primary market in the next few months, the fact that the pricing might have to be more conservative because of the state of the market or that quantity itself will probably go down a lot?
The pricing in a book-building system is always related to the current prices in the market. Therefore, there is no choice but to be market driven. Since the trend in the market earlier was rising, it was natural for the issuers to expect a higher price than those prevailing and therefore, they were offering no discounts or very low discounts to current listed prices.
But once the trend is uncertain or even falling, I think those companies that see making the IPOs as a strategy imperative, will definitely be happier or happy to offer bigger discounts. So I think it goes hand in hand with the secondary market and there are no prizes for guessing really what will happen.
What about stories for which there may not be listed comparisons?
Even in those cases we do look at alternative industries, growth industries or industries that will make profits in a period from now. We do look at what the market is doing, whether the market is using DCF multiples, whether the market is using EBITDA multiples. We always find some pattern. There may not be an industry benchmark, but then, there is a category benchmark that one uses.
Overall, do you see less paper hitting the market in the last six months because a lot of companies had planned up some dilution plans, whether through FCCBs or QIBs, etc?
I think it is a little early to say because one has to see how the secondary market shapes up.
One has to recognise that at least a part of the meltdown, was a part of the global process where everywhere the markets fell 10-30% on an average, and so this might not be only an India story.
But the cyclical pressures are here and if this market remains flattish, we would see fair amount of paper issuance. But if the market goes down for any reason after hitting a new peak, then we would have some trouble.
I would say that given the commitments that companies have made to capex plans, given the fact that Sebi rules have made GDR and other issues outside the country a little more difficult, I think the prospects for the primary market remains pretty decent.
There has been some speculation on whether to tweak the retail component of the IPO market or the primary market, either to suggest the ceiling in terms of personal incomes or to toy with some kind of a lock in for retail investors, where do you stand
I think one has to keep the rules very simple. We have to allow easy exits, easy entries, because if we create too many rules, although sometimes our intentions are good, they don't work well. I would say, take corrective action where it is required.
But otherwise, we have to keep things simple because this country is evolving and we have seen the cut-off go from Rs 50,000 to Rs 1 lakh and then again we want to define incomes, so I don't know how it will work out.
Do you expect there to be a difference in terms of the size of participation across categories, whether it is HNI, Institutional or retail?
There has been some tweaking in this area in the past and that is okay because it has not reached the limit and regulators in the government may have their reasons to tweak the limits one way or the other. Generally, my view is that India is fortunate in terms of having a large retail market and we should do everything to make that grow. But otherwise, we can probably continue to experiment the limits, if we feel comfortable about that.
Was is becoming a bit easy though, to hit the market with an issue because we have got two smaller offerings, which have pulled back because they haven't seen enough subscription?
I think in a volatile market, one can understand that investors need to be cautious whether they are FIIs, retailers or HNIs, but once the market becomes steadier, people see that fundamentals are at work and continue to remain at work. I think the interest always comes back because after all, the share of equities in domestic savings is a very small one and it needs to go up. There is an appetite for it.
Second, people have to see gains on listing. If for the last six months these gains have been absent or small, then I think it is only natural that there is some reluctance on the part of the investors. But I think it is a correction process and the markets have corrected. If the stocks go up, I am sure the interest will also come back for good issues.
How do you read the interest rate scenario and how do you see rates moving, locally and globally? How does it pan out for equities as an asset class? Do you see any significant trending changes happening in interest rates, either globally or locally and what would it mean for equities?
I think the markets have responded to this real fear of interest rates going up. Because of the fact that markets reacted so violently to this fear, I think the need for that interest rate correction itself has gone down, as George Sorros would say that this is reflexivity at play. So one need not worry too much of runaway interest rates, but one definitely has to be cautious, after all the cycle is pointing towards that.
How much the interest rate will go up, how tight the liquidity will be, one has to really wait and see. The good thing that we are seeing since the 1929 depression is that the Central Banks around the world seem to be a lot more proactive, they seem to be acting in unison.
That is why there is a sharp reaction to any move up or down, but the good thing is that these corrections last only for short periods. So I would say that we have seen a lot of corrections already. Even if we have a steady market over the next 6 months, I think we would return to good times very soon.
Do you think we are closer to fair value than we have been in the last six months and what kind of a fair value band do you see for our market now?
I think markets are definitely more fair and that is mathematical. Whenever investors have caution in their thinking, it is generally okay because there is a cap on prices then. As the time elapses, valuations become much more attractive because next year's earnings are on the horizon.
So from that point of view, one has to worry for some sectoral changes like what happens to commodities, what happens to the impact of commodity prices on product companies and so on. But I think, we are in the comfort zone and the market seems to be finding a trading zone at this point of time, which is a very healthy thing. We need a time wise correction from now onwards, rather than a price wise correction.
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