A Rajagopal, ED & Head-Equity, Capital Market India of UBS Securities said that he does not subscribe to the decoupling theory. Rajagopal was speaking to CNBC-TV18, in an exclusive interview. The global markets will continue to impact emerging markets, he pointed. In India, the domestic consumption is giving support to the markets, Rajagopal said.
According to Rajagopal, the secondary market pain is impacting primary markets. He is not concerned about the valuations of IPOs, though.
Excerpts from CNBC-TV18’s exclusive interview with A Rajagopal:
Q: What do you think about the primary market debate, with a lot of issues getting repriced and talks about price manipulation with the MoF paper?
A: The Ministry of Finance discussion paper is contemplating an increase in the free float, from current minimum levels of 10% back to 25%, which was the level prior to 1999-2000, when the process to bring it below 25% started.
If it is put in context of how this is done in other global markets, including some of the developed markets, there is no absolute percentage for all sizes of companies. Wherever there are minimum dilution criteria, it is typically a sliding scale. If the marketcap of the company is larger, they are allowed to get away with smaller free float. That percentage keeps increasing as the marketcap of the company decreases.
That is a very practical way to approach this because not one size fits all, in terms of the minimum percentage dilution. In some of the markets, like New york stock exchange and Nasdaq, the criteria is the minimum number of shares, which is to be there in the public domain.
So, our guidelines would probably also emerge in that direction, rather than have a minimum percentage for all companies.
Secondly, there is also some debate on what constitutes a public shareholding. From what I have understood, even holdings by financial institutions and FIIs are being considered for exclusion from the free float. That is again not consistent with what we do even in Bombay stock exchange. The Sensex is today a free float adjusted indice. All the holdings by financial investors, like FIIs, are part of the free float. It should continue with that because these are freely tradeable shares. So, those are a couple of points that I would like to make on the MoF paper.
Q: What do you think this risk aversion can lead to? Are you expecting 15-20% cut at the Sensex level and even more in the midcap level?
A: The overall market is clearly following a global trend. Everyone has realized that there is no such thing as a decoupling theory; whether India, China or some of the emerging markets are concerned. So, what will subsequently happen in the market is going to be driven by macro-factors.
At UBS, we believe that the fundamentals of the economy continue to remain strong. There is a level of domestic consumption, which gives some amount of cushion to the economic performance for Indian companies. But we are not insulated from the global trends, in terms of investors’ risk appetite towards equity, which has obviously come down considerably over the last few weeks.
Our view is that the direction in the market has to emerge. Markets can directionally trade down. There is no problem about that. But we are seeing an extreme amount of volatility; not just in India but in all the global markets.
That does not help investors and they cannot take a call, which is why we are seeing a lot of investors sitting on significantly larger percentage of cash than they would like to. So, the developments in the global markets are going to continue having an impact on Indian markets.
It is difficult to say whether the Sensex will correct by 15-20% or will go back by 5-10% at this point in time.
Q: What do you think is going wrong, from an investment banking perspective, with larger IPOs as well as some of the smaller ones that have come in? Do you think they have actually been priced at fairly aggressive valuations? Do you think it is more of a systemic issue, with what has happened in the secondary market, that has actually taken this toll on the primary markets?
A: I think it is probably the latter because the primary markets clearly follow what is happening in the secondary market. If you look at some of the IPOs, in the month of January like Future Capital or Reliance Power, they have got extremely good investor response. Future Capital listed at the end of last week and is trading well above the IPO price.
If you look at some of the other IPOs, which are currently on in the markets, investment bankers have been sensible to reprice in a couple of situation downwards, in keeping inline the sentiment in the market. So, I do not think anybody is taking the markets for granted. People are still trying to do transactions where investors can make money especially in the IPOs.What we are probably seeing is more of an impact on the follow on offers in QIPs, which is probably not so visible as the IPOs. But a number of transactions have actually got deferred.
In the case of listed companies, investors do have the option of buying the same share in the market. So, the case for a follow-on offer becomes that much weaker.
Q: The market is not getting the direction that it is seeking. Nevertheless, at what levels would you advise people to start deploying the cash, they are sitting on and in which sectors?
A: Clearly, at this point in time, it is not so sector specific when the markets have corrected. We have seen, in the past as well, that the recovery typically seems to happen first in the largecap stocks.
In general, the fundamentals of most of these companies remain pretty steady. So, we would see a lot of the buying coming back in those companies, when the overall sentiment recovers.
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