The Indian Gold Rush and AIM

Wednesday, October 21, 2009 | Posted by: Saurabh Mukherjea
Categories: | Tags: India, India Price Index, South Asia, AIM, Capital Markets, Indian Economy, London Stock Exchange, Alternative Investment Market, Noble and Company Limited, Saurabh Mukherjea, Sectors

The Indian economy grew by more than 6% last year and is likely to repeat that performance again this year. Unsurprisingly therefore, global investors are running to invest in the Indian stockmarket. In the six months since March 2009, $13.7bn of foreign equity capital has entered India. This is equal to the figure that entered India in the whole of FY08, a year which was hitherto viewed as the high watermark of foreign investor interest in India.

Given such interest (which has resulted in the domestic stock market rising by 110% since 9 March 2009) in this vibrant economy and its large stockmarket (market cap of $1 trillion), what role possibly could AIM play?

There are three specific reasons which make AIM an interesting listing venue for Indian companies:

1. Scarcity of debt capital: Indian corporates borrow at a premium close to 200bps relative to their peers in other economies. In fact other than in sub‐Saharan Africa, nowhere is corporate debt as expensive as it is in India. Whilst the reasons for this are complex ‐ they range from the absence of domestic corporate bond market to the “External Commercial Borrowing” norms imposed by the Indian Government – the upshot of it is that for a small‐mid corporate the cost of debt could be upwards of 12%. At such rates, equity capital starts becoming an attractive alternative.

2. The sheer scale of India’s requirements: that India needs $500bn to fund its infrastructure‐build is an oft quoted factoid. Since debt markets are largely absent, this capital will have to come from a mixture of bank loans and equity. If one applies a standard debt:equity ratio of 70:30, India’s infrastructure equity capital requirement is $150bn at least. Doubling this figure to account for the equity needs of the rest of this rapidly growing economy, gives a $300bn equity capital requirement. The Indian stockmarket simply cannot fund such a figure over the next 3‐5 years creating an obvious role for AIM.

3. Scarcity of IP valuation skills: India’s prowess in IT is well known. The country has an equally compelling competitive advantage in the space where Media meets IT (eg. animation, special effects, news editing). Moreover, the country’s domestic Media sector (from TV to print to film production) is set to be a disproportionate beneficiary of its unique demographic profile (no other country has ever had as many people aged between 15‐25 as India has today). In all of these sectors, where the assets involved are largely intangible, AIM has a deep pool of valuation and due diligence skills.

Hence, as risk appetite returns in the Western world (AIM All Share up 21% in Q3) and as the Indian economy accelerates further over the next couple of years, we are likely to see more Indian CEOs heading for London.

Saurabh Mukherjea
Head of Indian Equities
For Noble and Company Limited