A fresh look at M&A industry trends and opportunities in India
M&A Insights – India magazine 2019
Oaklins presents the first issue of this new magazine dedicated to M&A in India. In this edition, an update on the Indian economy, the most promising sectors for M&A in India, interviews with India’s prominent finance and business leaders and an overview of the Indian M&A landscape.
A taste of what's to come
Editorial note - Vikas Dawra, Managing Director, Mumbai, India
Over the past decade, Indian companies have mainly focused on the domestic market for consolidation. This is largely due to high domestic growth (a GDP increase of more than 7% over the last five years), with substantial future expansion opportunities making domestic acquisitions attractive: and also, because of the increasing cost of cross-border acquisitions (due to the high cost of capital; debt financing can be upwards of 8.5% without currency hedge and the steady depreciation of the Indian rupee versus the US dollar).
2018 was a milestone year for markets, as M&A activity in India hit US$130 billion in value. This was characterized by platform transactions in infrastructure and energy, inbound M&A transactions, financial sponsor buy-outs and industry consolidation opportunities arising out of the Insolvency and Bankruptcy Code (IBC) process (more on that later). 2019 has seen subdued M&A activity, given the stress in the financial system due to various challenges — including accelerated reforms disrupting the usual way of doing business, some related stress in financial institutions and geopolitical tensions, among others. With the emphatic election victory of the ruling National Democratic Alliance (NDA) coalition in the recent general election, the Modi 2.0 government has undertaken decisive policy reforms and initiatives — like sharp, corporate tax cuts to stabilize and grow the economy. There is a virtual, ongoing detoxification of the economy and, while the outlook has been neutral to negative on M&A activity, many business leaders see the current churn as long-term positive.
The government is committed to enhancing the ease of doing business in IndiaVikas Dawra, Managing Director, Mumbai, India
The Indian economy is going through a painful period but is expected to emerge with greater transparency and an emphasis on high standards of corporate governance in the business community. Focus is on strong auditing and creditrating standards. Banks and financial institutions are being held accountable for robust risk management and credit rating.
The government is committed to enhancing the ease of doing business in India, and Modi 2.0 has introduced pathbreaking structural reforms. It is not possible to discuss them all in the context of this summary, so we encourage you to read additional material on initiatives like JAM (Jan Dhan: ensuring all Indians have a bank account; Aadhar: unique identity number; Mobile: access to affordable mobile data). Some notable focus areas include 100% electrification/grid access, which will bring an additional 30%+ of the population into the mainstream economy. The IBC ushers in a substantial insolvency reform, enabling banks to resolve delinquent accounts transparently and rapidly in a time-bound manner. The goods and services tax (GST) has made the tax structure much simpler. The government has offered significant corporate tax cuts, making India an attractive tax regime on par with other South East Asian countries. Several other reforms are in various stages of implementation.
The current government is expected to continue its reform process and make India a much more enticing investment destination for overseas investors, corporate houses and, of course, for domestic M&A. Pension Fund Limited managers, largely out of Canada (CPPIB, CDPQ, Brookfield and others) and, to some limited extent, Australia, have introduced long-term patient capital to the Indian economy. Most have preferred a platform approach to M&A and have built up large, hard business assets around a competent core of management.
Preferred sectors are commercial real estate, warehousing, toll roads and renewable energy. India recently saw the first-ever public listing of infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). Most global private equity funds and sovereign wealth funds have local presence and have been actively investing in India. Historically, funds have focused on growth capital taking minority stakes in high-growth companies and exiting either through a strategic sale or an initial public offering (IPO). In the last few years, there have been various opportunities for a buyout, and this is now becoming a preferred route for funds.
We fully expect continued business activity in TMT, logistics and infrastructure in the coming years as India catches up with the rest of the developed world markets
Significant disruptions of business models are hitting Indian shores as well. The technology, media and telecom (TMT) sector has seen major consolidations, with the emergence of new players. Internet of Things (IOT)-enabled businesses in logistics, FinTech, food delivery and eCom are receiving capital from global investors. We fully expect continued business activity in TMT, logistics and infrastructure in the coming years as India catches up with the rest of the developed world markets. This will open up various opportunities for inward investments in these sectors.
The next few years will be very exciting, as the country reaps the benefits of reforms and global capital makes its way to India. With its deep demographic advantages and the availability of a robust financial sector backed by a businessreform- oriented government, we expect M&A activity to increase manifold.
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For more expert commentary on the M&A market in India, download the full version of this magazine (pdf).
M& Insights India