Merger and acquisition (M&A) activity in India has surged to a record of about $175 billion this year driven by large deals by corporates and buyouts by PE firms. This comes at a time of volatile stock markets and a downturn in the technology sector. In an interview, investment bank Moelis India’s chief executive Manisha Girotra talks about the various factors that are driving dealmaking in India. Edited excerpts:
How do you see the M&A activity shaping up in the coming year? Will corporates give a tough fight to PE funds which are sitting on large sums of dry powder?
Indian M&A stands at $175 billion in 2022 YTD. Private equity and venture capital contributed around $65 billion of this number and the balance was largely Indian corporates merging or acquiring other businesses in India. This demonstrates that the Indian corporate sector is keen to take large inorganic bets to increase their market share in a growing economy.
Going forward, there are three themes which will drive M&A in India: A play for scale and dominance, to take advantage of disruption and lastly, the transition to more sustainable business models. Large Indian conglomerates will continue to play for scale and size and are willing to pay a premium for it as greenfield gets more expensive. Structural reforms like ONDC (open network for digital commerce), OCEN (open credit enablement network) and digitization of the logistics sector will challenge old business models. This will also lead to consolidation in the physical and online business models to provide the consumer with an end-to-end solution. The transition to sustainable business models in the energy and EV spaces will lead to a number of opportunities. Indian corporates with their strong and well-capitalized balance sheets are looking aggressively at consolidation themes across existing sectors and looking to foray into new sectors. For example, Vedanta formed a JV with Foxconn to enter the semiconductor sector, while Adani acquired Holcim’s India assets to enter the cement sector. I see a 50:50 split between corporates and private equity in the M&A game in the next few years.
Given the slowdown in tech funding, do you see a wave of consolidation in the sector in the coming days?
Yes, the tech sector should see consolidation with large groups like Reliance, Tata, Adani, Flipkart acquiring businesses which have good business models but are strapped for cash. We will also see consolidation within the sector with larger, well-capitalized companies buying out smaller companies which have a differentiated business model, a set of customers, or a unique technology but need capital.
Fintech will lead the wave of consolidation as financial services need large amounts of capital to cater to the Indian diaspora. With the launch of OCEN, incumbent banks will face disruption as lending becomes more cash flow based and this will also lead to M&A opportunities. With the launch of ONDC, the e-commerce sector will face disruption as more businesses move from unbranded to branded segments, and more sellers and buyers meet on a neutral platform. This will lead to acquisitions and consolidation in the retail sector.
Pharma and healthcare sectors have seen a rise in buyout activity post covid. What’s driving this rush of asset sale in these sectors?
The Indian generic industry is the factory to the world, sized at $100 billion, and expected to grow in double digits annually. In addition to exporting generics to the world, the domestic formulation market is also growing rapidly. With the pandemic and the launch of Ayushman Bharat Digital Mission, healthcare spending will increase. Governance is high in this segment and government intervention is low. Hence private equity has and continues to invest in this sector.
Infrastructure, across renewables and roads, continues to attract large sums of capital. Do you see the capital flows in these sectors to remain strong in the coming year? What opportunities are you looking at in these sectors?
Infrastructure, renewables and roads will continue to attract strong capital inflows. The first reason is that structural reforms like GST and the digitization of logistics will enhance India’s economic activity levels, leading to improved infrastructure as fund managers look to put capital to work into roads, ports and other infrastructure sectors.
Second, India continues to be the office to the world. With outsourcing spend expected to increase from $180 billion to $500 billion by 2030, we expect increased demand for both commercial and residential real estate in urban India. This has led to large capital flows into the real estate sector from funds like Blackstone, Brookfield and GIC.
Third, given India’s commitment to the Paris agreement and improved transmission and distribution of power, we will see rapid transition to renewables and increased consumption of power. Global strategics like Shell, Indian renewable companies and infrastructure funds like Blackrock are taking positions in this sector as they see the growth opportunity in this segment.
While the developed markets are worried about recession, Indian public markets have returned to their peaks. Do you see public market sentiments as a challenge to valuations in private market dealmaking?
I believe a strong public market is a positive for private market deals. It gives confidence to private investors that exits can be obtained for their investments in the public market and they don’t have to rely on strategic investors only to provide them with an exit.
Of course, a robust public market can crowd out some private deals but given India’s current stage of development, we need robust capital inflows in both private and public markets.
As a boutique investment bank that has been active in India for over a decade, how has the franchise evolved and what is the mid-term growth strategy for the firm?
The Moelis franchise in India has evolved in line with the Indian economy. Earlier, the activity was restricted only to a few sectors like pharma, IT services and consumer but as the Indian economy has entered into a phase of accelerated growth, we are seeing more broad-based deal making across sectors like real estate, infrastructure, commodities, technology and others. So business is deeper and wider.
Are you planning to hire more bankers for the coming year? Which sectors are you looking to strengthen your team in?
Moelis & Company is always focused on attracting top talent to help serve clients and grow our business. So we plan to continue hiring strategically as talented professionals look to join a global, collaborative firm like ours.
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