Large domestic companies look to M&A to offset challenges of slower organic growth: Rothschild & Co’s Subhakanta Bal

The positive aspect of India’s consumer story is that it is largely domestic, which shields it to an extent from global disruptions. However, volume growth hasn’t been strong in recent quarters. If you look at FMCG companies, volume growth has been muted. Even for other consumer related segments such as quick service restaurants (QSRs), the same-store sales growth has been muted, and in some cases, it has even been negative. In select pockets, we are seeing signs of improvement, but low volume growth has been a pain point in the recent past, slowing overall revenue growth.

Despite this, valuations remain robust for consumer companies in India. Whether it is FMCG, personal care, or retail, valuations continue to be high. There’s a bit of a disconnect between these valuations and recent performance. However, long-term growth remains promising, driven by low market penetration, favourable demographic profile, rising disposable incomes, and willingness to spend.

What trends do you see in M&A in the consumer sector?

There’s growing interest among large domestic companies to pursue domestic M&A as a way to offset the challenges of slower organic growth. Acquisitions allow these companies to continue growing, even if their organic performance is limited. Besides domestic interest, we’re seeing significant inbound M&A interest from global majors in the FMCG sector. There’s also strong private equity interest, which is increasingly materialising into actual transactions. The challenge remains on the supply side—how many companies are open to being sold. Many companies, especially in the consumer sector, have alternatives to private deals, like going public, given the high public market valuations.

Are global majors already established in India driving this inbound interest, or is it new entrants?

Both, actually. Those already established in India are naturally more interested as they understand the local ecosystem. But we’re also seeing interest from companies with little or no presence in India. Among the top global FMCG companies, India is recognised as a key growth market. Establishing a meaningful footprint in India has become essential, not just a "nice to have." This has led to a strong demand for inbound M&A in consumer sector in India, especially in food and beverages and home and personal care.

How are valuations in the public market space affecting private deals?

Public market valuations are indeed high, in part aided by domestic liquidity in the market, largely thanks to factors like increasing share of financial assets and rising mutual fund investing. Public markets are a formidable competitor to private transactions, more so in the consumer sector with companies having adequate scale to go public choosing this over private transactions, especially when promoters / owners don’t have a need to monetise their entire stake. As long as domestic liquidity remains strong, we see limited triggers for a sharp correction in valuations.

With a 20-25 percent premium over long-term averages, the current market is at a high, but not extremely so. And if interest rates decrease in Western economies, foreign investors might reallocate to India, which could further act as a trigger to sustain valuations. The strong domestic liquidity and attractive public valuations make it challenging to find companies willing to pursue private deals at prices that are at a material discount to public market expectations.

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Are there concerns about these high valuations, especially with potential earnings growth?

Good question. Much of the high valuation is supported by domestic liquidity and investors’ willingness to accept a slightly lower return profile in public markets. For instance, with a lower cost of capital, investors may still justify high valuations even if earnings growth is only moderate. Many investors view low double digit returns in equities as favourable compared to fixed deposits or debt markets, which channel more funds into equities. Even with modest earnings growth, if enough investors continue to support public markets, the high valuation trend can persist.

The margin expansion story that supported earnings growth without strong revenue growth is tapering. Future earnings growth will likely require actual revenue growth, particularly in sectors like FMCG and consumer goods. Recent comments from some of the consumer companies suggest that 2025 may be better and hopefully the current festive quarter demonstrates green shoots of this uptick.

 Could you discuss the trend of formalisation in consumer markets and the shift from unbranded to branded products?

Absolutely. We’re seeing a significant shift from unbranded to branded goods across categories, including food, beverages, apparel, and dining. There’s also an increasing willingness to spend more, both on essentials and experiences. Post-COVID, consumers seem even more inclined to indulge in experiences, leading to a stronger focus on experience-driven spending. Higher disposable incomes and aspirations for quality products are driving consumers to prioritise branded goods. The growth of luxury brands in India exemplifies this trend. Items like high-end bags, electronics, and cars, which were previously niche, are now seeing rising demand. This aspirational shift is helping to drive growth across both essential and luxury segments.

Do you see opportunities within the supply chain of the consumer sector that could attract private equity interest?

Absolutely. Given the high valuations in the B2C segment, private equity sponsors are increasingly investing in the "N-1" categories, essentially focusing on areas that support the consumer economy indirectly. For instance, contract manufacturing, packaging, and logistics companies that supply, or support consumer brands are becoming attractive. These areas allow investors to tap into India’s consumer growth without directly competing with high valuations in B2C. Valuations in these N-1 sectors are generally lower than those of B2C companies, though valuations in these segments are also rising. Many of these supply chain companies are seeing increased interest, and for investors, this approach provides a way to benefit from the consumer story with relatively more affordable assets.

Is there a specific reason why companies might prefer public markets over private transactions?

Yes, public markets offer high valuations, especially in consumer sectors, making them more attractive for companies that meet a certain scale. Consumer businesses are generally asset-light, with relatively low capital needs once they reach a particular size, which means the need for primary funding is quite limited. Even from a working capital perspective, consumer companies are favourable as they often operate with negative working capital cycles. This makes it easier for them to grow without seeking external capital, which lessens the pressure to pursue private deals. For companies which are, therefore, only desirous of part stake sale and satisfy the size threshold (to go public), meeting this objective through public markets is more efficient given higher valuations.

Looking ahead, are there specific themes or shifts you believe will shape the consumer market in India?

Definitely. Formalisation is likely to grow as more consumers shift to branded products across sectors, from food & beverages to household goods. The trend of "affordable luxury" is also catching on, driving demand for premium brands. At the same time, consumer companies are likely to continue focusing on brand building, given the rising demand for branded goods. Increasing consumer aspirations, rising disposable incomes, and a greater emphasis on experiential consumption will keep driving the consumer sector forward. Companies that effectively cater to these evolving needs are well-positioned for growth.