The unexpected victory of Narendra Modi and his Bharatiya Janata Party in the Indian elections held in May is described by many economists as a potential boost for the country's business climate.
Indian M&A is widely expected to get a further boost from foreign and domestic investors alike as dealmakers across the board are feeling increasingly confident when it comes to India. The markets have been welcoming Modi with positive sentiment all spring.
India has for too long suffered a reputation as a difficult place for foreign corporates to invest, thanks to its complex regulatory climate, difficult taxation and slow legal system.
It's not always been viewed as such. India did become a key growth country back in 2006 and investors woke up to its potential. Investments were flowing in and political climate was perceived as good. Instability and risk existed in acquisitions but it was seen as part and parcel in investing in a developing economy.
Then, few years later, global economy took a turn for the worse, India’s growth stalled and economic reforms failed to take wind. Investors disappointed and many exited.
Fast forward to 2014 and India's mega elections where voters showed their disappointment and decided to get rid of Congress – led Union government. Modi didn’t spring out of nowhere but he has already shown a great deal of promise in the business world.
"Changes were achieved in Gujarat in terms of better roads, greater electricity connectivity and foreign investment. With a resounding majority, the government is well poised to bring about the same changes nationwide and business will get a boost," said Akil Hirani, managing partner of Indian law firm Majmudar and Partners.
EXPECTED CHANGES
All the optimism and Modi-hype isn't without foundation. There have already been promises to make India more investor friendly and resolve ongoing issues plaguing several foreign companies.
One of the key issues throughout the entire election campaign was the economy and India’s return to growth. Now that the new Bharatiya Janata Party – led government has been sworn in, swift changes are expected in the corporate world.
"The messages that are already being sent in various forms to corporates, explicitly and implicitly that there would be an emphasis on stable, strong and directional governance for equitable economic growth," Devangshu Dutta, chief executive of Indian management consultancy Third Eyesight, told EMIS.
As a result of the positive sentiment, the country’s growth prospects, coupled with the Modi effect, both inflow and outflow M&A activity is expected to perk up significantly.
"The Indian market is headed for increased growth, and economists are confident that with minimal ease India’s GDP can touch 6% within a year. Therefore, it is a good time to invest in India and M&A activity will increase significantly in India," Hirani noted.
Many overseas companies, stalling their India investments for long, took a jump-start straight after the election. Several deals have been announced as a result.
Norwegian telecoms group Telenor is seeking government approval to acquire 100% stake in its Indian mobile services unit Uninor and auto giant Mahindra is reportedly keen to acquire Swedish automaker Saab. Blue chips such as the Japanese conglomerate of energy and infrastructure Hitachi, drinks giant Diageo, Gulf airline Etihad and credit card group American Express have recently been mentioned as likely suitors for Indian assets.
Global giants and regional players alike are on the move. Activity from the Gulf countries, which has had hundreds of years - old trade ties in India is set to get a boost as Foreign Direct Investment (FDI) rules are further relaxed.
Other Asian countries are expected to view India with a renewed interest, especially Japan. The recovering economies in the US and Europe, may seek investments in India.
Domestically, both large and small companies, listed and unlisted are on the move as the boost in M&A is a result of increased business confidence.
Many family - owned companies are keen to capitalize on India’s growing appetite for consumer products. For instance the Indian aromatic and herbal care products company Sunflower recently told EMIS that it was is looking for an acquisition target to boost its market presence and like many of its peers, is considering overseas expansion via M&A route.
"Domestic companies believe that the strength of their local businesses and increase in domestic demand, due to potential measures to curb inflationary trends, will enable them to leverage their balance sheets to make both offshore and domestic acquisitions," said Shinoj Koshy, head of corporate at Mumbai-based legal and tax counseling firm Nishith Desai Associates.
Apart from industrial buyers, private equity activity is widely expected to spice up in India. The current crop of private equity investments in Indian companies are largely of the 2006-2007 vintage – back in the days when India was a byword for growth.
"These are ripe for exit as several of the PE funds that made these investments are coming to the end of their fund life and are under pressure to book returns before returning to their LPs for new round of fund raising," Koshy told EMIS.
Private equity players may make several exits, which may be through IPOs on the back of bull markets, or secondary sales. Carlyle's acquisition of Avenue Capital’s stake in Medanta Medicity or the reported plans for Punj Lloyd to offload its stake in Medanta Medicity to KKR are such recent deals.
Sectors that could see increased M&A activity include defense, auto and steel, where balance sheets are robust and strong enough to withstand a slowly recovering economy, the experts noted.
"Foreign investors have also expressed interest in sectors like health care, consumer goods, luxury goods, media and technology. Domestically, pharmaceuticals and telecommunications seem to be sectors that are ripe for significant amount of consolidation activity," Koshy said.
Later next year as the government policies become clearer engineering, power, steel, cement and other infrastructure-related sectors are likely to undergo consolidation.
Deal valuations are rising as a result of the positive sentiment. Sensex’s positive performance has already led to companies capitalizing on the sentiment and raising capital through institutional placements.
"This has also had a knock-on effect on valuations and there has been an improvement since before India had its general elections early this year," Koshy added.
Pension funds and sovereign wealth funds (SWF) would also be likely to invest in Indian growth companies with strong governance. Many billion-dollar SWF’s welcome India’s increased liberal attitude to fund investors.
Globally, there have been sensitivities around SWF participation in local markets because of political and strategic tensions. But in India’s case, the country desperately needs foreign dollars for infrastructure and energy sectors and SWFs may just be able to provide the capital it needs.
GIC, a Singapore-run sovereign wealth fund, has already opened an office in India and others are expected to follow suit.
RISKS
Despite the current euphoria, some market watchers are advising caution. Indian mid-cap companies, especially those with low trading volume, may see inflated valuations and make deal-makers wary.
“Many are exercising caution right now because of Modi-hype. There is an added pressure on the market because of stock prices have risen in the last six months, and the momentum may not continue,” said one local broker.
Currency is also a notable risk in M&A, the experts noted. Strengthening rupee, already up 2.5% this year, could also put off overseas buyers as Indian companies will become more expensive.
Whilst optimism is currently the byword for Indian markets, many dealmakers are taking watch and wait – positions.
"Investors across Indian asset classes have learnt their lessons over the years. The market is uncertain and India can be unpredictable for all kinds of reasons. The same applies to M&A," said the broker.