With a slowdown both in the overseas and home economies, the M&A market has been somewhat dull over the past year, with few big ticket transactions to talk about. Sanjay Agarwal, Head, Investment Banking Coverage & Advisory, Deutsche Equities India, believes that the lull could last a while since Indian companies aren?t sure yet whether prices of assets overseas have bottomed out or whether they could fall further. Agarwal tells Ashish Rukhaiyar and Shobhana Subramanian that the Japanese could turn out to be among the biggest buyers of Indian companies in the next few years.
Given the slowdown globally, there should be some distressed assets available. Do you see Indian companies scouting for acquisitions?
There is some dialogue, but whether deals will happen is uncertain because right now people don?t know where the bottom is in terms of distressed assets, and prices could go lower. There are lessons that people have learnt from the past though that?s with the benefit of hindsight; when you?re in the midst of a deal, it?s different. Some of the businesses that Indian companies have bought can never be built.
But also, today, leverage is expensive in India, interest rates are high at 11-12% and debt is not easy to find. Moreover, globally too money is scarce, given that banks in Europe are cutting exposure because they need capital. And India is not a triple-A country. Companies would need to be more confident of the strength of their balance sheets and the operations in the home market so that they can borrow to fund acquisitions. When there is pressure in the home market, people tend to be more cautious.
How do you read the sub-text of Indian conglomerates wanting to invest overseas rather than create assets in India?
As businesspeople become wealthier, the need for diversification comes into play; in a global world you don?t want to necessarily have all your manufacturing businesses in India. That?s one perspective, but it?s also a mix of other things. There is a slowdown in India in terms of the ability to set up greenfield projects, given all the litigation and the opaqueness of markets from land and natural resources to environmental policies. So it?s a question of how long it takes to set up a project.
There is hope that the situation will improve in the second half; the markets have run up after the liquidity put out by the ECB. Generally, when the stock market does well, the sentiment improves. But from a local perspective it depends on how the government implements policies once elections are over.
So far, cross-border acquisitions?Indian firms buying businesses overseas?have been cash-driven. Do you see a situation in the near term where there could be share swaps?
I don?t see international investors becoming comfortable owning Indian stock in the near future. One issue is the governance reporting requirement that Indian companies follow. Even if an Indian company is listed on NYSE, there could be different rules that companies need to follow. The comfort factor is not there. Also, you have to get comfortable with a new management, a new CEO running a business out of Mumbai. We are still some time away from international companies accepting shares of Indian companies. So, most transactions will continue to take place in cash. There are also legal issues because in India we have capital controls. For instance, Bharti tried to do a dual listing when it was buying Zain, but that didn?t work due to capital controls.
The big trend in cross-border M&As over the past couple of years has been that of foreign firms buying out Indian companies, especially in the pharma space ?
You will continue to see FDI interest in anything that plays to the Indian consumption story because you can never build scale from scratch. Some of the domestic pharma players are very entrenched and have build good distribution. So, this trend will continue. But the quest for natural resources will drive Indian companies offshore. And natural resources, by sheer size and given where commodity prices are, is the field where we will see the big-ticket transactions. ONGC, for instance, will continue to scout for oilfields.
However, I see a trend where there will be big Japanese investments into India; it?s happened in pharma, steel and insurance and there could be much more investment. They are willing to pay because the cost of capital is low.
Are more second-generation entrepreneurs willing to sell out?
Yes, five years ago you would have been thrown out of a meeting if you asked someone to sell their business. But now it?s a meaningful conversation; sell-side discussions are happening. Also, when assets are sold and there?s cash, you need to find a home for it. So that helps the wealth management piece.
Are there a lot of fresh PE deals being struck, given that promoters in India have tremendous resilience?
Although promoters, especially those that have several businesses, may want to sell, they are able to hang in there because they continue to have access to capital from public sector banks and that drags the tough decision-making some distance away. But, at some point of time, capital will become a constraint and companies will have to live with reality. Again, many PEs are exiting, especially those who have made good money in the BFSI space, so there are some blocks on sale. There are some long-only funds that are on the lookout for blocks. But it?s difficult to put money to work in BFSI, given the cap of equity of 5% in banks; in the NBFC space there are constraints in terms of size. Most trades are secondary market transactions or part of a QIP or preferential allotment. But PEs like a bigger stake.
Are you seeing Indian conglomerates looking to shed peripheral businesses? In the past they have been reluctant to do so ?
Promoters will definitely channelise their resources with a view to allocating capital to the business that they think will do well and remain competitive. Many of the groups don?t want to be marginal players and would be willing to discuss exit opportunities. In the domestic space, consolidation is likely in spaces such as telecom once the policy framework is in place and in the Tier II and Tier III tech companies. In the IT space, newer companies will emerge and our big IT companies will continue to grow, but it?s unlikely they will do very large transactions. They have shown a lot of capital discipline; a whole generation of banks has pitched deals to Infosys, in hindsight, thank God they didn?t get tempted.
Do you think the government will be able to pull off some of the disinvestments that it?s planning?
We are not part of the ONGC transaction but I think, if timed well, it should not be difficult to place a 5% stake in a company like ONGC.
What do you make of Sebi?s recent rules for Institutional Placement Programmes?
This is positive because it makes it easier for companies to do a transaction. There?s greater flexibility because markets are volatile and one can now do a deal in a shorter time frame. Sebi could look at the rules for reverse book building because small shareholders are holding up deals.
