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In volatile markets, long-term planning is must to raise equity

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Pipeline of IPOs looks very strong for 2019, says HDFC Bank official

Investors are currently holding back investments though one could look at the large-caps especially in the consumption sector, said Rakesh Singh, group head  investment banking, private banking, capital markets and financial institutions, HDFC Bank. Excerpts:

How do you see the 2019 election outcome impacting markets?

Voters will look for jobs, growth, consistency of policy leading to investments and public welfare. Governments are unlikely to tinker a lot with such policy matters but the form and distribution may change. Presently investors are holding back fresh investments. However, consumption growth is expected to continue. Investors can add investments in consumption sectors and wait for government policies on infrastructure to take an informed investment decision. One option is to park a part of the money in debt for about 9 to 12 months and again re-look at allocation after evaluating the scenario at that point in time.

As the new government assumes office and announces policies in June/July, investors can identify the companies/ sectors benefiting from it and choose investments accordingly.

So, your advice would be to stick to large caps till the elections?

I believe investors can allocate a significant surplus in large-cap stocks and remaining portion in good emerging mid-caps/ debt. The equity market has stalwarts and some upcoming stalwarts too! One needs to invest in both. It is worth investing in those companies which have talent, drive and passion to grow and which ultimately help investors earn superior returns.

How does the IPO pipeline look like in 2019?

Very strong. Issue of capital is very much required for growth. For banks to lend more debt, companies need to raise equity. However, the market needs to see more capital flows. Infrastructure and financial sector needs capital. Strong operating results provide internal accruals which helps add some debt but firms can go faster if they can get external capital.

What are the avenues for funding? Equity markets have been very volatile

It’s difficult to time raising of capital as markets go through uncertainty and volatility. A good learning is that if equity is required in the next two years, it is advisable to plan in advance. Having spent more than 25 years in capital markets, I have seen markets shut for long periods of time and and then the floodgates open and everybody is welcome.

How soon do you think it would turn conducive for fund raising?

There are two factors. The first one is the forthcoming polls. There will be periods of news-driven volatility mixed with pauses where the markets will be directionless. Second, flows are still continuing to come in large-cap companies and hence they are still doing good. But if you really want to see a good pipeline of capital raising, it will be post elections combined with flows across all segments.

What happens in the worst-case scenario if companies are not able to raise finance?

Growth will get curtailed. That is the first challenge. The second challenge is some companies may become over leveraged and may need to sell assets to deleverage. For them, raising private equity is an option.

Wealth management has become very competitive with many banks and brokerages eyeing a pie...

We have about 40 million customers and have the most affluent clients banking with us. Our wealth clients are broadly distributed across three segments - the mass affluent, the super-affluent and the ultra HNI. We are very sanguine about the future of the wealth business as 80-90% of assets are presently held in physical form. As we move forward, fresh allocation to physical assets like real estate and gold is reducing. A transition in asset allocation is underway. Our customers are very important to us and we strive to provide them a comprehensive and composite offering. The core of our wealth business is our approach to achieve consistent long-term financial well being of our clients.

Has the approach of investors changed after the recent IL&FS episode?

Credit ratings and rapid transition of ratings have spooked investors. Credit ratings factor [in] objective financial parameters in addition to subjective elements such as promoters, shareholders etc. Going forward, I believe that lesser weightage will be attached to subjective factors and it will be more dependent on objective financial parameters.

On another note, I believe that timely action if taken can help save economic value of assets. If we take a look at assets subject to IBC process, there has been a fair share of recovery. This recovery could have been higher and equity shareholders may not have seen such deep erosion in value, provided the promoters/ shareholders had chosen to inject more equity earlier. With the IBC and NCLT now defining a time-bound process, I believe that promoters/ shareholders will strive to bring in equity, either on their own or through other means sooner than what we have seen in the past.

Do you think that smaller NBFCs will have a tough time surviving?

Small and large may not be the right way to look at NBFCs. A lot will depend on their business models, capitalisation, asset liability management and asset quality. We must evaluate the capitalisation of NBFCs and their ability to raise capital.

The other important issue is ALM and associated gap positions. If the ALM is well managed, then the NBFC can handle tight liquidity situations. In particular, long tenor assets may need to be funded with a higher proportion of longer term liabilities. However, the quality of assets and cash flows matter most. If the lender has good quality assets including those that generate regular cash flows, then meeting the redemption of maturing liabilities can happen out of flows from assets and any mismatch can be met through fresh borrowings.