In India, M&A activity has been fairly robust in the past 4 years. Domestic private equity deals have been responsible for USD 8 to 10 billion out of the USD 30 to 40 billion deal volume each year with the remaining balance attributed to domestic and cross-border M&A. In this article, I share my perspective on the different global and domestic factors that have contributed to this consistent level of deal activity in the region.
Continuing Strong GDP Growth
Since Prime Minister Modi started his term, India has shown economic growth with its GDP increasing 6 percent to 7 percent annually. This has currently made India one of the fastest growing markets globally, gaining investor and business confidence.
Introduction of the Insolvency & Bankruptcy Code (IBC)
In 2017, the government introduced the Insolvency & Bankruptcy Code (IBC). Similar to the US and the UK, the IBC empowers lenders to take companies into insolvency and drive a resolution process for the recovery of their debts. Around 800 companies have been placed into insolvency by the banks this past year due to this code and has created multiple opportunities for both private equity funds & companies to buy distressed businesses inexpensively.
Government Initiatives Leading to Financial Inclusion
Given the depth and breadth of the country, a large segment of the population in rural India has not had access to financial products and subsidies to help improve their standard of living. The government has implemented key initiatives such as the opening of no-frills bank accounts.
In addition, the government established the unique identification code system “AADHAR” for all residents of India, which would enable the disadvantaged and distressed section of the population to have direct access to monetary schemes and subsidies of the government.
Industry Shift from Unorganized to Organized
Online Retail Growth
Emerging market currency volatility
Since January 2018, the Turkish Lira had devalued by 50 percent sending a shudder through emerging market currencies. The Indian Rupee has fallen by 11 percent in this period. What has helped the US dollar to rise are Trump’s tax cuts and investment incentives to bring back capital to the United States. Although India’s central bank intervenes from time to time in the spot and forward markets, this approach rarely tends to work in helping keep the currency stable. This, together with the escalating global trade wars, indicates that India’s currency will stay volatile for some time.
Rising Oil Prices
Low oil prices helped strengthen India’s economic growth as the country is a major importer of oil. A ten dollar per barrel rise in oil prices increases India’s fiscal deficit by 0.1 percent. Oil prices have recently risen to USD 75 per barrel from their previous USD 50 per barrel. India’s ability to maintain a high rate of economic growth will be tested under these circumstances.
A Strong US Economy
The US economy surged to an annual growth rate of 4.1 percent in the April to June quarter. Although this growth rate seems unsustainable in the medium term, a strong US economy having been providing attractive returns for some time, makes it difficult for larger funds to flow into emerging markets such as India. India’s relative asset valuations are also higher which makes transactions more expensive in India than in the United States.
A Growing Indian Insurance Industry
The Indian Insurance Industry is about to enter the next phase of growth with life insurance companies currently breaking even and being listed in the Indian Stock Exchanges. In the last 10-15 years, it has witnessed significant growth as well as reputed global companies forming joint ventures with Indian corporates to set up life and non-life insurance companies.
More opportunities await the industry, especially with India being the second most populous nation, accounting for only 1.5 percent of the world’s total insurance premiums.
Stronger Fintech Sector
The sudden demonetization of the 500 and 1000 rupee notes in November 2016 led to a significant emergence of new fintech companies, driving innovations in product, customer acquisition and servicing, which in turn, have attracted venture capital funds, private equity and strategic investors. We have recently seen this in recent investments by global players such as Alibaba, Ebix and Google in the country.
A New Opportunity to Buy Distressed Businesses
The large number of transactions emanating from the IBC implementation is starting to draw significant hedge fund and distressed fund interest. Today, about 30 distressed funds are actively evaluating this market opportunity. We are seeing transactions in multiple sectors like steel, cement, auto, food, telecom, power, pharmaceuticals, construction sectors, among others.
A Changing Healthcare Sector
The expected transformation of the Indian healthcare market to provide quality services has been attracting investors, with an average of USD 5 to 6 billion in annual investments coming in through M&A deals.
Alvarez & Marsal Global Transaction Advisory Group has built a unique multi-disciplinary approach that offers an integrated value proposition for due diligence services, combining deep financial, industry and operating expertise across multiple sectors. We help identify key issues pre-deal and then seamlessly implement solutions post deal to help make transactions successful for our clients.
The Firm has been at the forefront of the implementation of the IBC and is today managing India’s largest insolvency case with debts of USD 8 billion. A&M’s understanding of the operating, financial, legal and tax aspects of the IBC and our deep lender relationships are distinct advantages to buyers of distressed businesses. We offer an integrated buy-side advisory service to buyers and an integrated sell-side advisory service together with managing the affairs of an insolvency business to lenders.
A&M has built a global center of excellence in India for commercial due diligence services. A&M has also built an Analytics center of excellence in India which works closely with our global transaction analytics team based in the US.
For more information about our Cross-Border M&A services: https://www.alvarezandmarsal.com/expertise/global-transaction-advisory