‘ESG as an investment theme not fully understood in India’

Will the current secondary market rally lead to opening of IPO, QIP fundraising opportunities for companies or is the investor sentiment still weak? 

There are signs of life back after an almost three-month hiatus. Having printed four trades (deals) in a week, we certainly feel very encouraged by the reversal in fund flows, return of FPIs into equity transactions and a bout of market stability. Like in any capital raising cycle, it’s the quick-to-market trades like blocks and QIPs that get executed first, followed by longer lead products like IPOs. While secondary exits will continue, QIP opportunities will be a function of primary raise by listed companies. While we feel very confident about IPO markets coming back at some point later this year, one has to stay patient and be tactical around market windows.

  Given the current challenges for tech companies to tap capital markets and valuation corrections expected in the private markets, what is the outlook for tech fundraising? 

We haven’t seen the public market corrections follow through to private markets yet, helped partly by the abundance of capital available in the private space. Moreover, a lot of larger private tech companies are sitting on comfortable capital cushion and are showing admirable discipline on capital outlay and willing to recalibrate growth plans while conserving capital. We will see rounds happening in certain pockets but the extent of that will be driven by the ability of companies to ride through the current market weakness and speed of market reversal. It would be quite natural to see realignment and consolidation along the way.

Given the focus on ESG, how important is the renewable sector for you? 

We, as a bank, champion ESG and have taken leadership position in this segment. Renewable energy is right at the centre of ESG-themed investments. It’s even more contextual for India given our pace of growth with 80% of today’s electricity generation relying on fossil fuels. Our national ambition of 50% renewable energy by 2030 requires massive investments of over $230 billion. We expect significant institutional and FDI inflows into the sector to meet financing demand across capital structure. We are market leaders in Indian renewables with a near 70% M&A market share. We also took India’s largest renewable player public in the US last year.

Will the deal-making momentum in renewables continue for the rest of the year? 

Absolutely. With the Russia-Ukraine war, energy transition theme is now merging with energy security goals as countries realize they need to diversify away from fossil fuels. Despite macro headwinds, ESG focus is only increasing further and we see that panning out in the processes that we are running now. Many of the large infra/ESG focused funds have raised massive funds helped by post-pandemic liquidity and are looking to deploy aggressively. On the other hand, strategic interest is driven by broader corporate goals towards energy transition. One specific pocket that we see are getting increasingly aggressive is the old-world energy and resource majors. We have seen companies like Shell and Thailand’s PTT take a large bet on Indian renewable market and we continue to get more and more inbounds.

Why is the renewable sector absent from the capital markets? Isn’t it a concern that domestic investors don’t have access to one of the most exciting sectors in the Indian economy? 

That’s true. There has not been a single pure play renewable IPO in India. It has a lot to do with the fact that Indian markets and investors are yet to see renewable sector differently from traditional utilities, where public investors have had indifferent experiences in the past. On the other hand, ESG as an investment theme is again not fully understood in India. We are still to see domestic pools of ESG capital. However, things are changing. A lot of traditional utility companies now have massive renewable portfolio and investors are appreciating this transition. ESG theme in public domain is slowly gaining traction. Sebi recently proposed a framework for ESG rating, which is likely to help the cause.

 How big is the energy transition opportunity? 

As I mentioned, renewable energy requires an investment of $230 billion. Broader energy transition includes other themes like green hydrogen ($100bn), storage ($250bn), and e-mobility ($150bn) which together require additional capital of $500 billion. Divestment of assets is one of the strategies that may become popular as companies look to free up capital. We don’t think it would negatively affect ESG scores as most of this capital will get reinvested in new capacities.

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