As I have written in previous columns, Bangladesh can take a good deal of pride in the relative resilience of both the stock market and the economy to the current global financial crisis.
But assessing the potential bottlenecks for us to achieve an 8 percent inclusive growth target, a critical factor likely to limit the future growth of companies and emergence of new entrepreneurs, is a lack of risk capital and an over-reliance on over-collateralised bank lending.
One way to overcome these constraints is certainly to attract more Foreign Direct Investment (FDI) and foreign portfolio flows. But I would argue, an equally pressing objective for the new government should be to focus on how best to grow the domestic capital markets and develop new domestic investors.
As the chart illustrates, Bangladesh has one of the lowest market capitalisation/GDP ratios in Asia and indeed among emerging markets more broadly. Even after last year's 55 percent market decline, India stands at 84.1 percent and we are also well behind Pakistan and Sri Lanka.
This reflects more than 90 percent of Bangladesh's top 100 companies have not yet listed. We have to ask why and what the costs are of allowing this situation to continue.
In this context, I want to address the current uncertainty about the timing of the IPO of Grameenphone (GP) and why I believe a successful stock market flotation will be a pivotal catalyst in our capital markets development.
A Daily Star article, dated March 4 stated: “Grameenphone's initial public offering is likely to be further delayed, despite fulfillment of the market regulator's conditions by the mobile phone operator, putting the pre-IPO investors, including the institutional ones in disarray. The government is now more focused on settling the ongoing crisis stemming from the BDR mutiny.”
Clearly we all recognise the need in the immediate aftermath the BDR mutiny tragedy for the government to deal with many pressing issues. But there is also a need to show the international community that Bangladesh is still a good place for foreign investors to consider.
Against this backdrop, I would like to discuss why approval by the SEC for a GP flotation to occur in Q2 is so important and address some potential concerns regulators may have: Firstly, the largest IPO in Bangladesh's history is likely to trigger greater interest from foreign investors to come to the Bangladesh market. There may be some potential concerns from the stock market authorities that a fresh demand for $65 million of capital from the market might affect the values of other stocks or indeed the overall level of the market. However, if the GP brand is sufficiently strong domestically and internationally, we are likely to see significant new interest from foreign as well as local investors.
Also, contrary to conventional economic wisdom, supply will likely create new demand. So we might argue that a successful GP flotation will help support the market by attracting new investors. This is particularly relevant as the current global stock market turmoil is increasing the interest in frontier markets like Bangladesh, which have low correlations with global markets. International investors will be attracted to invest in a GP issue not only on the basis of a strong brand, but also good corporate governance and transparency.
Although the proposed IPO will be domestic rather than specifically targeted at international investors, as was the original intention last summer, it would still be surprising if GP's first issue did not see purchases even in the secondary market from overseas buyers.
By contrast, a second delay to the GP issue will almost certainly send a negative signal to international investors about the commitment to developing Bangladesh's capital markets. The risk is that they focus on other frontier markets in Asia such as Vietnam and Cambodia.
As I highlighted in my last column about FDI, there is a great deal of competition among countries for global investor attention. We need to ensure we maintain their interest and confidence in investing in the Bangladesh economy.
A second potential issue is the valuation of the proposed IPO. It is critical that we move away from the net asset value (NAV) method of IPO towards a more market-based valuation method. In that context, the proposal by the SEC to move to a book-building method of valuation is important and should be introduced as soon as possible. No owners will sell a business at a massive discount to their true value and a failure to change this will see the DSE/CSE fail to attract major companies to list.
Coming back to the GP issue, valuation techniques are complicated by typically focus on international and local comparisons for Price/Earnings (P/E) ratios. GP does not appear expensive to us at their Tk 7 face value that has been proposed.
By international standards, Bharti Airtel, India's leading mobile company, trades at a slight P/E premium to our estimates for GP. But we would argue that GP has a far more dominant market position and brand name than Bharti in India. In addition, mobile penetration in Bangladesh will likely increase from around 28 percent currently, as it remains low, certainly relative to the 80 million mobile subscribers in Pakistan with a population of 160 million, versus 150 million in Bangladesh.
Investors, who might potentially be interested in investing in GP or any other telecom companies that come to market, need to see their future earnings growth prospect, the outlook for new 3G (third generation) wireless networks, industry consolidation and cost reduction opportunities.
We still see significant scope for all the mobile companies in Bangladesh, including GP, to develop a broader range of value-added services, such as mobile banking, greater internet access, doctor on call, Cell Bazaar. This suggests the earnings prospects for them are reasonably attractive. But ultimately, the strong demand seen for the $ 60 million pre-IPO placement seen in December suggests valuations were not unreasonable.
In conclusion, we would argue that developing Bangladesh's capital markets is an important objective for the new government. The decision to broaden the number of asset managers is a welcome step.
The SEC has also been taking some important initiatives in starting the book-building process. But it is important we recognise the damage that might be caused by yet another delay to the GP IPO.
Hopefully a successful flotation later this year will provide the catalyst we need both to attract international investors and for the next phase of the stock market development.
by- Ifty Islam
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