Worst is definitely over for midcaps, smallcaps: Girish Nadkarni, Motilal Oswal Investment Banking

Financials and consumer companies will continue to dominate in terms of capital market fund raising, said Girish Nadkarni, managing director, Motilal Oswal Investment Banking. In an interview with Sanam Mirchandani on the sidelines of Motilal Oswal Annual Global Investor Conference, Nadkarni said there could be some slowdown on the capital markets side in terms of deal execution, but that would be only because of shortterm uncertainty in the run-up to elections.

Edited excerpts:

2017 was a blockbuster year for IPOs, but this year we have not seen the same momentum. What are your thoughts?

The larger issuances have happened in the first half of the calendar year. There have been a fair bit of IPOs which have happened in the first six months. Towards the end of the year, there could be some slowdown in the capital markets side in terms of deal execution largely because of market volatility and uncertainty. But this should pick up in the next five-six months because the appetite for capital raising is increasing. There isn’t a shortage of capital on the demand side. Mutual funds which were collecting about ₹20,000-odd crore a month at the peak, their monthly collections are about ₹8,000 crore to ₹9,000 crore now, but they are still positive collections and the SIPs (systematic investment plans) are growing. For good-quality IPOs or goodquality transactions, there is no dearth of supply. The domestic mutual funds and the insurance companies overtaken the FIIs in terms of investments in capital markets and in fresh issuances, but we are now seeing them come back. The sovereign funds, global funds and long-only funds are looking at select investments both through issuances in IPOs and QIPs as well as through preferential route.

What is your reading of the market sentiment with benchmarks being at an all-time high levels?


We have seen a divergence in the market. The large-cap stocks have been going up consistently while midcaps have fallen almost between 30% and 35% from the peaks. The earnings growth in fact this quarter has been by and large very good. The slowdown because of GST transition is almost over. The performance of companies continues, and the stocks’ valuations are down. Because there was volatility the sentiment was hit a little, but it is coming back reasonably well now. We have seen interest spreading from large caps to midcaps again.

Is the worst over for midcaps and small caps?

The worst is definitely over. The volatility should definitely ease over the next six months because there will be clarity. State elections will be over. We are almost in September now. By March next year, we should have got over most of the volatility in the market. There are people who seek value and who can ride out volatility. Elections is a constant process. Indian companies have grown throughout this. The fall that we had seen is now stabilised. Earnings are coming back. Things are much brighter. Maybe expectations had moved up ahead of earnings, but they are getting tempered now. Demand for credit is strong. Monsoons are by and large good this year. Post-harvest, we expect demand to be strong. Auto demand continues to be good and it is the case for industrial consumers and financials as well. Domestic formulation companies are doing well. Demand for healthcare is improving. There will be some sectors which will have the volatility but by and large earnings should be pretty good.

Is the period till elections going to be very sparse in terms of IPOs?

The only thing which can throw this thing off gear is the interest rates. We have seen two hikes in this year itself. Although the impact is with a lag, interest rates definitely tend to temper down demand. The number of issuances might reduce in the next three to six months, but the size of the offerings could be larger. A lot of the money that is waiting is waiting to be put into quality companies. Once the confidence comes back on the midcaps, which already is underway, we should see offerings. Two months ahead of that people would not want to get into the thick of things because they can be caught the wrong way on volatility. So, to that extent, there could be fewer offerings. You could probably see more preferential allotments and placements and those kinds of deals because those are oneon-one deals, not going to the larger market. Fund-raising this year will definitely be lesser than last year, probably by a factor of 25-30% but I think the overall interest, it will get compensated to a large extent by either private equity investments, PE deals going up. That’s only because of short-term uncertainties.

Which sectors will continue to dominate in terms of raising money from the primary market?

Financials and consumer companies will continue to be the highest percentage in terms of the deals. Last year, for example, financials were the largest. In technology, a lot of the action is in the consumer internet companies.

The market regulator is looking to reduce the time between IPO closing and listing. Are investment banks prepared to deal with this?

It is a fairly tight process, but regulations have evolved to make it easier in terms of getting access to data on the closure etc. It is a part of continuous evaluation. We now have T-plus-2 on the trading side. At one point 20 years back, it used to be 30 days. There is a point up to which you can probably crunch it. T- plus-6 is a fairly tight process right now and it is reasonably quick. If it is shorter, then they may have to maybe change some of the processes of application in IPOs etc. If it completely moves to e-application, then the days can be cut.