Mumbai: There are a few “Indian champions” that are market leaders in their sectors, well capitalized and have the aspiration and appetite to make global acquisitions, says Pramit Jhaveri, head of global banking, India, and vice-chairman, Asia investment banking, at Citigroup Inc. A few days after he spoke to Mint, one such firm, Bharti Airtel Ltd, announced it had revived merger talks with MTN Group Ltd of South Africa that would create a global telecom firm with 200 million customers and $20 billion (around Rs95,000 crore) in annual revenue.
Jhaveri also says that foreign direct investment, or FDI, flows into India will remain buoyant despite the global economic slowdown. India attracted FDI worth $33.6 billion in 2008-09, just about 2% down from the year before.
Attractive destination:Citigroup’s Pramit Jhaveri says big companies cannot afford to remain uninvested or underinvested in India. Abhijit Bhatlekar / Mint
As a new government takes charge in New Delhi, Jhaveri underlines the importance of reforms, the sectors which will see investment and outbound flows. Edited excerpts:
FDI for the past two years has been pretty strong in India. How do you see it going forward?
We have been very bullish on FDI for the past two years, notwithstanding the global economic scenario and the global and local stock markets. We continue to be very bullish on India’s FDI prospects.
If you look at Fortune 500 or Fortune 1000 multinationals as a sample, it is our view that any company that is either uninvested or underinvested in India simply cannot afford to remain that way and will look to make investments in India. In fact, we think that India is and will continue to remain on the radar screens of CEOs (chief executive officers) of such companies. And if this is, in fact true, we can expect that FDI flows will remain buoyant.
If you break down these potential FDI flows, they would typically be greenfield, brownfield and inorganic. Greenfield FDI flows have historically lagged behind the other two and will really depend on the investment climate that exists to make these attractive.
And as far as M&A (merger and acquisition) is concerned, we have historically seen a correlation between the Indian stock markets, valuations and domestic liquidity and seller perspectives. Having said all that, our pipeline of inbound M&A remains pretty solid and will, no doubt, be enhanced by the expected stable political environment and imminent reforms.
How strong will these flows be?
We expect FDI inflows will certainly increase in a stable political and reform-oriented economic environment. Further, to the extent the government relaxes foreign ownership in certain sectors like insurance, banking, civil aviation, real estate, etc., such relaxation will almost certainly be followed by significantly greater flows. We have witnessed that clearly in the past in sectors such as telecom, IT services, pharma, etc. In FII flows and flows related to the raising of equity capital by Indian companies, we have already seen a pretty dramatic and amazing change over the last few weeks, and it is our expectation that these will continue to be solid going forward.
So, are you saying that incremental FDI will depend on reforms?
Incremental FDI will be driven by reforms and will be driven by the political and economic climate that the strategic investors see in India. Incremental FDI will also be driven by the attractiveness of India as an investment destination relative to other emerging markets. And, to a certain extent, it will be driven by global liquidity in the equity markets that has been sitting on the sidelines for the last few quarters, and will start looking to find its way back into the system and get redeployed.
What draws them to India?
Domestic growth predicted on local consumption and demand, low-cost outsourcing and natural resources.
What about outbound FDI where Indian companies invest and acquire firms abroad? Do you think another Corus or Novelis would happen?
I don’t expect that we will return to the heady days of 2006 and 2007. It appears implausible that some of that irrational exuberance will be repeated. Having said that, there are a number of what we call “Indian champions”—companies that are market leaders in their respective sectors, companies that are extremely well capitalized and have access to cash and, equally importantly, companies that continue to have global aspirations and the appetite to match these aspirations. With such companies, we expect that we will continue to see multi-billion-dollar outbound acquisitions. However, I expect that there will be a couple of differences from the last time around.
We will see more muted valuations, and we will see a lower component of debt assumed for such acquisitions.
But what about the experiences of those who did acquire companies? Some of them are struggling with those purchases…
There has been a lot said and written about some of the mega outbound acquisitions by our large Indian companies.
I think it is a little unfair to pass judgement on these acquisitions at a time when there has been a significant downturn in the global economic environment and the sectors in which these companies operate. The truth is that several of these Indian companies have been extremely successful in the industries that they operate in for several decades and I think one will have to assess the success, or otherwise, of these acquisitions over a longer period of time. If there is one learning from the acquisitions of the past, it has got to be to avoid the very high levels of debt that were assumed to finance these acquisitions.