The market shot ahead of valuations last year without factoring in the effects of

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high inflation and poor monsoon. There are speculations that oil could be inching towards $100 mark this year. These issues will affect sentiments on the Street, says Abhijeet Biswas, director of mergers and acquisitions at Equirus Capital, in an interview with Vikas Srivastav. Excerpts...

How do you rate the year gone by and what is the sentiment in the market now?

The September quarter was not very encouraging and lots of positives were built up due to excess liquidity in the market and the stimulus packages. But you now have a huge problem with inflation and oil prices are expected to touch $100 mark. I see few negatives coming out of it. Prices of all products are bound to increase over the next five months and industries dependent on oil as input such as logistics, transportation and food items are going to face some pricing pressures.

Water shortage is going to be a serious problem. The market did not factor in the effects of a poor monsoon in valuations and shot ahead.

Which sectors are you bullish on?

There are few sectors, which are recession-proof, such as healthcare, power and education. But even they are facing issues on price and technology fronts. Hence, they may not do extremely well.

The price control regime is going to affect profitability of pharmaceutical companies while returns on the non-conventional sources of power generation have not been very attractive for power companies.

Going forward, nuclear power is the only way out unless the government subsidises other forms of non-conventional power generation. We are bullish on the nuclear power sector as it will provide long-term returns and conform to global warming standards.

How about the infrastructure and real estate?

The infrastructure sector has seen the maximum number of QIPs and most of these companies are sitting on healthy order backlogs. Also, the National Highway Authorities of India has come out with a plan to build around 20 km of roads per day. All the companies participating in infrastructure-building exercises, such as airports and railways, will do extremely well in 2010.

However, we are not very optimistic about the real estate sector. Even the IPOs in the pipeline are not blockbuster ones. The demand that we see is more due to benign interest rates. Once interest rates rise again, demand will slow down. This, coupled with high land valuation and liquidity issues will most likely pull the sector down in 2010.

As a private equity player at small and mid-cap levels, you participated in some major deals in 2009, including L&T Finance's acquisition of DBS Cholamandalam. What was your modus operandi in effecting a balance between client satisfaction and finding the right valuation for companies?

The method we successfully adopted was a combination of equity at current valuations and partly compulsorily convertible preferential shares (CCPS), where the money will get converted into equity at a higher valuation at a later date.

This helped the current promoters to get the money required for growth, but to prevent dilution of their stake to the extent that they could lose control. It received very good response, as promoters found an instrument that gave them interest benefits of a bond and provided money for growth.

Which sectors are you bullish on as far as deal making is concerned?

We are bullish on power, water and education sectors. All these sectors will see a lot of private equity investments in 2010.

Lot of foreign players are interested in either partnering with Indian power companies to participate at the technology level or to find a wider audience for their products. We are also getting queries from Indian companies, who are looking for foreign partners for waste-water treatment.

What do you think the year 2010 holds for investors in general?

The next one year will have a cyclical pattern of growth and it will be directed by event-led triggers. If the GDP doesn't grow at 7 to 8 per cent, then the market may react in a negative way. Similarly, if interest rate benefits are pulled away or the budget is not to the expected levels, they will affect the market.

We may not see 80 per cent growth as in 2009, but it will be a good year for dealmaking as lot of consolidation is happening at the industry level. I don't see any one sector doing extraordinarily well. Also as the dollar is getting stronger, it will increase opportunities in export-led businesses. Overall, it will be the year of opportunities to be treaded with caution.