?Raising $40 billion is not outlandish?

UBS, which has had a presence in India for nearly two decades now, believes that strong earnings growth will propel the Sensex to 22,000 by next year. Rajagopal A, head of global capital markets at UBS Securities India, tells Samie Modak and Shobhana Subramanian that while the secondary markets may remain choppy, companies shouldn’t have trouble raising money if valuations are right.

There is a huge supply of paper waiting to hit the market. How much do you feel would actually come in?

In 2007, India Inc raised over $30 billion, while 2008 was a lacklustre year globally and last year, over $22 billion was raised, nothing much happened in the first quarter. So, on an average, about $8 billion gets mopped up in a quarter and in 2009, the run-rate was close to that in 2007. This year, around $13-14 billion has already been picked up and especially in the first part of the year, when there was a lot of capital raising. Reliance did a treasury sale, Vedanta had a big convertible bond and the NTPC, NMDC and REC issues were in the market. May and June have been a bit dull, but the numbers of $40 billion that are being talked about are not outlandish. Had it been $80 billion, I would have said it?s bullish but $40-45 billion is not an unrealistic number. Whether this will get raised or not will depend on market conditions.

What are the market conditions telling you right now?

It has been quite volatile. We had a good run in the first couple of weeks in January, then going into February, it cooled off and started picking up in March-April. May was a very bad month, especially given all the developments that happened in Europe. The markets will remain choppy; it is not going to be a trend like last year, but people will be able to raise capital. Three deals in the China region have been concluded, of which one was a $70-million transaction and was subscribed 150 times. So, clearly, investors are putting money to work. Good quality companies, especially large ones, will be able to raise money if valuations are sensible and promoters are realistic in terms of expectations. This is nowhere near like it was in 2008 when no capital could be raised.

Talking of valuations, most of the recent IPOs are still trading below their issue price.

I agree that of the IPOs which hit the market over the last 12 months, a high proportion are trading poorly. I wouldn?t generalise at the same time and say every IPO is doing badly. For example, Standard Chartered IDR is trading reasonably well. From the retail investor?s perspective, there is room for scepticism and they won?t blindly buy into IPOs. That will take a little bit of time and only after a few more issues trade well people will start getting comfortable.

When the majority of IPOs has underperformed, how do you expect the retail portion of any issue to be subscribed?

It?s fair point to make that when retail investors are not making money, they have no reason to believe they will make money in the next issue. There is also a bit of an arithmetical problem.

For retail investors, we have a maximum cap of Rs 1 lakh. Now, if you take an average application size, even in well-subscribed retail issues, it?s about Rs 40,000. So, for a Rs 300-crore issue, with 30% the reservation for retail investors, is about Rs 100 crore. To get that Rs 100 crore, you need about 25,000 applications. But if you take large deals like NMDC, the retail portion reservation is high at Rs 700-1,000 crore. So, it becomes very challenging, and even in good markets if deals are doing well, it is difficult to get five or ten lakh applications.

Do you think the retail quota should be smaller?

No, I think the way to handle this is probably to increase the Rs 1-lakh cap. Maybe, for deals where the retail quota is higher, the cap should be increased. If you look at the data, a large percentage of applications come in between Rs 90,000 and Rs 1 lakh. That clearly indicates that people are willing to invest such amounts and so, if you give them a slightly higher limit, they will invest more.

But there?s so much undersubscription.

If you look at the data, around 40-50% of the applicants are putting in between Rs 90,000 and Rs 1 lakh. So, even if 25-50% of the overall pool applies for Rs 3-4 lakh, your Rs 40,000 average will all of a sudden shoot up to Rs 1- 2 lakh. Hence, the retail undersubscription should be judged by value. The only way to solve that is not by expecting a million forms to come for Rs 1,000 crore retail reservation, but by tweaking the definition. At the end of the day, Rs 1 lakh is just a number and it was set in an era where issue sizes in India were significantly small. These days, we are routinely taking about at least Rs 10,000 crore transactions and some of these limits probably have to grow in line with that.

Is the retail undersubscription a concern for promoters and merchant bankers?

If there is a reservation, then we should have an environment where the reservation is meaningfully subscribed. I don?t think the solution is reducing the retail reservation. At the end of the day, the ultimate goal of the regulator and everybody is to expand the equity culture in India, as only a tiny section of the population owns equity.

What is the UBS view on the markets?

Our current view is that the Sensex will go up to 22,000 over the next year. We remain quite positive on India and the markets and the only thing that we worry about are the macro headwinds. If something happens globally, it still could have a lot of influence on the funds flow, although it will not have any bearing on the underlying economic performance of India, Like we saw in May, so much of money moved out from the market because of the nervousness in the rest of the world.

India today is the most expensive market in the region. Are you seeing a rerating of the market?

As a house, we don?t think valuations are stretched, but we are not saying that the valuations are cheap either. We are not talking about a rerating of story either, we?re not putting a Sensex target of 22,000 and justifying that by saying PE (price-to-earnings) multiples will go up from the historical 15 or 16, to 18. Our predictions are based on the back of earnings growth and not on the back of a PE expansion.

What could trigger a rerating?

The issue about rerating is that there has to be a conviction that earnings will grow on a sustainable basis. I don?t think the market, as a whole, has arrived at a consensus that the earnings growth can be sustained. It could be 20% this year and maybe next year, too, but whether that will continue is not certain.

Which are the emerging markets that you feel will get more than their fair share of money?

Much of the fund flows are happening in China and India and that would continue to be the case because of the size and demographics. Also, in some of the countries which are resource-rich like Indonesia. If the market confidence remains on the sustained recovery of the resources cycle, those markets also would get a disproportionate share of the funds.