Deal activity will turn selective, cautious: Rothschild India head

Global investment banking bluechip Rothschild and Co. has been at the forefront of some of the largest cross-border merger and acquisition, restructuring and capital advisory deals in India. In an interview, Chandresh Ruparel, managing director and India head, laid out the key factors which will shape dealmaking in the near future, amid a volatile external environment marked by geopolitical uncertainty, including fears of a recession. Edited excerpts: 

How are current global uncertainties and rising interest rates impacting dealmaking activity? 

Deal activity will become cautious and selective here on. Deals will continue to happen but volumes will come down because of a number of factors. Liquidity is no longer as abundant as it was some time ago, and though valuations have corrected significantly, financing has become costlier. Therefore, we will probably see fewer but high-value deals. If you look at the Indian dealmaking scenario, the days of outbound transactions are practically over, barring a few select pockets such as IT services. The two major drivers of deal activity will be the restructuring space backed by the insolvency and bankruptcy regulations and the private equity ecosystem. However, if you look at private equity itself and how it is funded, you will notice that most of the funds that have had fantastic exits in the past had raised money via leverage. However, leverage will be cautious and costly and, therefore, many funds will probably think twice before drawing down committed funds. Also, there will be more questions than before from investment committees of private equity investors and there will be far greater scrutiny of transactions than before, which can somewhat restrict deal activity. 

Do you feel that India is better placed than its emerging market (EM) peers in the pecking order? Can India’s prospects of generating ‘alpha’ outweigh the broader risks with EMs as a whole? 

Not necessarily. I am not being negative, but my perception is that there was too much crowding that was happening as far as dealmaking is concerned. Investors were worried about missing out on opportunities, which added to the frenzy. However, the mad rush we have witnessed for a few years has subsided and many who had invested earlier are now marking down investments and those who did not participate in the rush are now thanking their stars. Though India has done better than the rest of the pack in terms of valuation, we had run up a lot too. As things stand, the focus has shifted from funding growth to developing meaningful businesses. So, in overall terms, the use of money is far more guided than before. I relate this trend to what happened in the aftermath of the dotcom bust of the early 2000, where we saw an extended period of moderation when it came to valuation and funding. 

How long will this period of excessive caution last? 

For the first time since the 2008 global financial crisis, we are seeing liquidity being sucked out of the financial system and this will not be without consequences. We will see at least two years of slower corporate growth. If you look at revenue, it will probably register growth as there is pent-up demand after two years of covid-led shortfall. Also, there have been structural changes in consumer behaviour, which will add to revenue increase. However, if one looks at costs, it becomes apparent that margin pressures will persist, accentuated by high interest and input costs. On the demand side, it is heartening to see that the rural sector is standing its ground and adding to the demand uptick. 

Which sectors will see the highest deal activity? 

Technology firms may see further consolidation. Pharma and healthcare will see M&A activity. New energy sector will require recurring investments. Within renewables, newer technologies such as hydrogen and energy storage will see great deal of interest.