Valuations are not a major issue, market uncertainty is

Updated: Aug 30 2008, 04:00am hrs
Ranganath Char is the executive director and head of capital markets products and investment banking at J M Financial. He is also director on the board of Association of Merchant Bankers of India. In an interview with The Financial Express, Ranganath Char spoke to Jigar Pathak & Sai Prasan on a variety of issues including the direction of the secondary market and its impact on the primary market. Char feels that, at the moment, it is difficult to predict the revival of the primary market due to uncertain domestic and global economic conditions. Excerpts.

How do you see the overall IPO market shaping up, with the number of public offers drying up this year

It is a well-established fact that the primary market in India is dependent on secondary market performance. We have seen in the past that the primary market has not done well because the secondary has not done well. The present situation is a continuation of that pattern.

Overall, the market has reacted to broader economic developments. In the past there were systemic issues that would suppress the market. The fact that this time there are no systemic problems hampering the market should be seen as a credible factor from the market's development perspective.

We see a lot of small IPOs coming through, whereas big IPOs are not getting a good response. What would you attribute this to

Generally, the impression is that it is easier to market a smaller issue than the bigger one. But it cannot be a general trend. Sometimes, it is easier to market bigger issues as well. However, if you look at the cumulative amount that was raised through smaller issues this year, you will notice that even this is far lower when compared to the previous year.

When do you think the sentiment will change When do you think the market will turn around for IPOs to hit the market

We are hopeful that the market will do well. It is very difficult to put a timeframe to that. It depends on several factors - both domestic and global. A stable market is more important for the launch of an IPO than a bull market.

A stable market means that there is some sense on the direction in the market, there is reasonable liquidity present and the valuations are fair.

At the moment, the prevailing high uncertainty in the market is the biggest problem. Given this, one is not able to take a call on several fronts, especially how the markets would behave during the subscription period. And then pricing is a big issue in these kinds of uncertain market conditions.

As regards the timing of the turnaround, it will be difficult to predict it. We have seen phases where the market has not been favourable for a timeframe of three to four years. And then, we have also seen the market turning around within four months.

What are the domestic and global factors responsible for the uncertainty in the market

Macro issues, including inflation, interest rates and growth issues are responsible for the market correction. Anyhow, the recent corrections witnessed in the market are actually healthy.

Do you think that the impact of the subprime factor has subsided or we could expect it to torment the markets further

There is no doubt that the subprime crisis has emerged as a big challenge. It is very difficult to say whether it is over, as the news flow on this subject is not adequate in India. Even people sitting in the US are not able to comment much on this problem.

How long do you think the fear of a crude oil hike and high food prices will impact the primary market

It is extremely difficult to comment on this one. It all depends upon how the different factors influence the stability of the secondary market, as this will decide the direction of the primary market. Several experts have taken a call in the last six months and they have failed in predicting direction of the market. It all depends how the global dynamics change, and this will indicate how the market will react.

Now, the Left is out from the United Progressive Alliance (UPA) combine at the Centre. Do you think that the divestment process and reforms will take off again What is your view on the recent political development

Apart from the divestment, we are hopeful that much of the liberalisation steps that have been planned in the last four years will fructify.

However, the time span is very short, as the four state assembly polls will be held in November and the Lok Sabha polls are early next year. We do not expect anything dramatic.

But, whatever will happen will be positive for the market.

We expect that apart from divestment, some steps in the direction of capital convertibility, enhancing capital inflows and streamlining of the capital markets will be taken.

There are talks of PSU disinvestment gathering momentum. Which are the PSUs you think will be divested Do you that in such a market condition these companies will be able to get proper valuation

We expect oil-linked PSUs and power and infrastructure PSUs to get divested first. Here, valuations are not cheap. And, moreover, valuation is not a major issue; market uncertainty is a bigger issue here. We need a comfort period of around six months, as this is important for the IPO to be successful.

RBI has hiked the interest rates to contain inflationary pressures. What impact do you see this having on the primary market

The markets have raced ahead of interest rates or inflation. Interest rates, per se, have not impacted much. The market has witnessed a huge FII outflow in the last three months due to the uncertainty in the global market and the tough monetary environment.

Will PSU divestment get an adequate response

Why do you treat PSU companies different from private companies A share is a share, whether it is the private sector or public sector. It is the same from the investors perspective.

However, there may be a lot of interest from the retail investor's point of view towards PSU companies. So the reactions would be slightly better than private companies, at best.