MC Exclusive: MNCs looking at India in a very different way as compared to few years ago, says JP Morgan's Navin Wadhwani

Navin Wadhwani, Head (Investment Banking), India

Private equity funds will edge ahead of strategics and continue to lead the way this year when it comes to M&A activity, even as more big block deals across sectors are on the cards. That's the word from Navin Wadhwani, Head (Investment Banking), India at top global investment bank JP Morgan who spoke exclusively to Moneycontrol on the hottest deal trends of 2024.

Wadhwani, a fitness enthusiast who has completed more than 15 marathons across five continents, including the Ironman Triathlon, believes India is 'firing through multiple cylinders' and expects more top global MNCs to list their Indian operations on the domestic bourses.

He says election season hasn't impacted deal activity this time and its business as usual. Pharma, healthcare, financials, technology, infra and energy are his top sectoral picks for M&A action going ahead.

Edited excerpts:

According to a PwC report released in February, in CY23, (M&A) deals totaled 793, registering a drop of 10 percent compared to CY22, while the total disclosed deal value for M&A fell by 38 percent. We are in May, so what are the early indicators? Do you think 2024 will be better than 2023 in both deal volume and value?

Let's put things in context first and look at the global perspective, followed by Asia-Pacific and then India.

If you look at it (data) globally, the volume in value terms of M&A on an average annually has been around $3.5 to $4 trillion. So, that's the volume that you see at a global level. And when you bring it down to the APAC level, it is around a trillion. If you had to include a 2021, which was an aberration, it was around $6 trillion. Those are the numbers that you see at a global scale.

Now, when you come down to India, typically you have seen around the value around 135 to 150 billion dollars on an annual basis. That is the broad range. If you look at the data three to four years ago, that volume value was around $75 bn to $90-odd billion, which has clearly improved in the last four to five years. I wanted to give you the data point that there has been a significant increase.

Now to your specific question in terms of 2024 vis-a-vis 2023? In my view, while there is a significant amount of deal activity happening, we are seeing a lot of deals getting announced and there's a lot of activity involving financial sponsors and strategics, we may end up at broadly at the same quantum of deals that we have seen last year.

One of the reasons for that is this time around, the equity capital markets are super active. And we see a lot of optionality around that, with some of these companies which are owned by financial sponsors which may look to go for equity capital market transactions. So, to answer your question, I think it would be around the same levels as what we saw last year, or maybe a little higher, because it was significantly lower than 2022.

Your answer leads nicely into my next question. Do you think currently there is a substantial gap between public market valuations and private market valuations? In the past, there have been a few classical M&A situations where bankers have been appointed and the process begins. Suddenly the promoter has a rethink looking at the public markets and there is a switch to an IPO. Has this become a trend now or you are seeing this switch only in exceptional cases?

It is not just the promoters, but even the private equity houses or financial sponsors are also thinking along the same lines. In a lot of situations that we are seeing today, people do want to go and do an M&A because it gives you a full exit, or a substantially full exit. Having said that, when they compare with the valuations that one gets typically in public markets, at this stage, there is a gap.

These public market valuations are higher than M&A valuations. But when you do a public market transaction, say an IPO, you are not exiting fully. So people are keeping themselves fully ready - in case they are not satisfied with the outcome of M&A, they would immediately switch to an IPO. So we are seeing those thematics playing. We are seeing in some of the situations, financial sponsors are already moving in that direction. I think this is something which will continue for some time.

For two reasons. One is public markets are pretty active and investors are showing a lot of interest. Plus, the additional confidence that people have got now is that I can sell a large quantum as an offer for sale and I can keep selling as we go along. The market has shown that depth for greater sell downs. This adds to the confidence that now I have a serious option of getting to an IPO and then selling down later, over the next couple of years, to be able to get my full exit.

All right, so you expect that to continue as a trend?

That will continue, yes.

Many experts have referred to India as a bright spot in the global economy. To what extent are you seeing MNCs looking at India as a listing jurisdiction? We have seen the example of a few big MNCs from Asia - a big Asian automaker which was in the news a few months back. There is also a consumer appliance player that is now looking at listing its Indian operations. So, are we going to see more and more big global MNC brands listing their Indian operations to either pare debt or to unlock value?

Let us go a little deeper into the fundamentals for a minute. And then I'll come to your question. No other country has seen such digital transformation as we are seeing at that scale, whether it's UPI, whether it's e-KYC, whether it's Aadhaar. All of that is changing and transforming the way we borrow, the way we lend and the way we transact. That's a clear bottom-up growth that we are seeing, a bottom-up transformation.

On top of that, if you overlay the capex that is being spent on infrastructure, especially by the government, it's certainly adding to the mix. We have been always a consumer-led growth economy, which continues to be the case. Service exports doing well and will continue to do well and in addition to that, the financial markets have significantly strengthened and deepened. Financial sponsors, sovereign wealth funds have a very strong base in India and they want to invest and deploy capital.

So when you add all of these things, and you look at the geopolitical situation that we are in, and with investors having no such significant alternative, and China plus one and Europe plus one on top of that, I think we as a country are actually firing through multiple cylinders.

And then, of course, hopefully, the political stability that we are all talking about should stack up in the next few months. So then you have very strong fundamentals, bottom-up growth, and a sustained growth over multiple years, rather decades. Now to your question- why wouldn't an MNC want to create a greater presence in India, and if they have a greater presence in India, how do they part monetize that or create more value, and create a much larger base in India? So look at that whole thematic and hence you are seeing some of these MNCs who have a large India presence are wanting to go and get their companies listed.

Do you expect that (India unit IPOs) from more MNCs in more sectors?

Look, it has to happen for the reasons that I explained. It is not just about the fact that equity capital markets are looking good. I think fundamentally, the country is doing well and when fundamentally the country is doing well, you want to expand your presence in India. You want to try and bring a bigger base. In fact, one of the things that you would see is that a lot of foreign strategics are wanting to come and invest in India. So that is adding to aspects like - if I have a smaller base, how do I expand that base? Do I want to have a new base in India? All these MNCs are looking at India in a very differentiated way as compared to a few years ago or several years ago.

You referred to political stability earlier. I'm tempted to ask you. We are right in the middle of the election season. Has it in any way impacted deal activity or is it business as usual across private equity, M&A and the IPO market?

It has been a little unusual this time. Typically, when you run up to the elections, you do see a little bit of slowdown in activity both on the equity capital markets and M&A. But this time around, there is an expectation in the minds of the investors that what is continuing will continue. Of course, there has been a little bit of volatility in the market over the last few days or last couple of weeks. But that I think is part of the whole journey that you go through. So to your point, look, activity right now is business as usual. It (elections) is really not impacting (deal activity) the way it has in the past where things do slow down. We are not seeing that.

During the Covid era and post that we saw the emergence of global private equity players who signed big, fat cheques and became the new strategics acquiring majority stakes in listed and unlisted firms across sectors. Of late, the domestic strategics seem to be making a comeback of sorts. Do you think the rest of the year will be dominated by PE funds looking at the bigger deals? Or there will be stiff competition from corporates?

See, I can't generalize this. It will be specific to a particular sector or specific to certain sectors. So yes, if you ask me, financial sponsors will continue to be super active, because they are seeing that - they can acquire a business, build a business, grow the business, and then get a good exit either through public markets or through M&A. They have seen through this full cycle and they are seeing the returns playing out.

Also this time around, they have found talent. They have found that India not only has the talent, but one can build high quality management, institutionalize it, and create a very strong base of institutional capabilities within an organization. That gets significantly valued when you're trying to build a company at scale. Like manufacturing in India, for India and for the world. That theme is playing very well. So the private equity houses are liking that.

Similarly, if you're looking at things around energy and infra, the thought process around investing in these segments and trying to build at scale is also creating an impact. So I think overall, if you ask me, financial sponsors will continue to invest and build businesses. In addition, to your question on the domestic strategics, we are seeing them in some situations. They would be certainly active if they are seeing that they can add-on to their existing business or be able to build that scale or build that capability to get into new emerging markets. But largely, I would still say it (deal activity) would be led by financial sponsors.

One key aspect of private equity funds is the LPs or Limited Partners and in many cases, the LP's are sovereign funds or pension funds. Are you seeing them making a push to make direct investments in deals or becoming a co-investor in certain situations? If that's the case, it leads to an interesting situation. All this while, you were a partner to the private equity fund and now you are a competitor. Can we expect more direct M&A investing from this segment?

So firstly, I think most of these sovereign wealth funds will be taking a minority position. That is data point one. Having put that on the table, I would say yes to your question. We are seeing in some of the processes, they are coming as co-investors, because if the deal size is relatively bigger, a private equity house may say that, look, while I can do it, but if I get a co-investor alongside with me, it just enhances my capability to be able to write a bigger check and be able to buy a bigger business.

So yes, we are seeing that happening. And increasingly, we'll see that happening more and more also. Because the check sizes are increasing right now as compared to two or three years ago, because businesses are getting bigger.

What about outbound acquisitions and India Inc shopping abroad? We haven't seen that in a while. Will that era come back?

Why should you? If you look at it the way India is firing through multiple cylinders. Growth is here. Talent is here. Consumers are here. The policies are being put in place. Confidence is there. Technology is there. And markets are here right? So why should you have your capital allocated to overseas geographies, when you can actually create value and grow in India? Having said that, we are seeing in some very specific sectors and very specific situations where people would want to go out.

Could you name these sectors?

We will see activity in pharma, healthcare is a space, chemicals as well. Where you are really trying to acquire new markets or some new technology. As a result of that, you are then able to build that in those overseas markets and try and also bring it into India per se. So I would say it's about markets and technology. I would say that if you look at any of the larger groups now, a good part of their capital allocation strategy is towards India. And a very good part of it is organic also. This is fundamentally showing the strength of not only the economy, but also the business houses and even the Indian promoters and their ability to execute projects.

You spoke about the large business groups. We have seen some of them looking at internal restructuring, carving out certain businesses, demerging verticals, and looking at various means to unlock shareholder value. In the past few years, some of them have entered sectors which they were not previously known for, so what trends do you expect in terms of deal activity from Indian conglomerates?

In my view, a good part of their capital will be organic, because of the amount of asset buildup that has to happen. Build versus buy will always be there. In any business house, you will say, if I can build it more efficiently, why would I go and buy it? And the market is not running away anywhere. So that is the first part. But for new verticals or for new businesses, they may look at some acquisitions to be able to add on to the capabilities and then build an organic capability on top of that and build the business. So you will see largely organic moves but they (conglomerates) will also look at some acquisitions, some new businesses.

In the second half of 2023, we saw many big, blockbuster, block deals across sectors and PE funds executed large clean up trades. Do you expect the trend of big block deals to continue in 2024 as well?

Certainly. I think it would and that clearly shows the depth of the market. What has also fundamentally changed this time around is that you now have a good mix of foreign institutional investors and domestic institutional investors. So earlier, if FIIs were moving away from India, you would see markets either seeing a correction or becoming volatile. Whereas now, if that happens, the domestic institutional investors are able to come in and bring in the stability. On top of that, you're seeing a lot of retail investments. The amount of SIP flow, which has significantly increased in the country, just adds to the mix.

We are at $4.6 trillion market cap of the country. And today we have 100 plus companies with $10 billion plus market cap. It shows the size and scale that we are operating at and in addition to that, I think this is the eighth consecutive year where we have had positive returns as a market. No other market globally has demonstrated that. So a lot of unique things are happening. The weightage in MSCI index has increased. So I think all of that clearly adds to the mix and allows these block trades to be able to be executed.

What are your top sectoral picks in terms of M&A activity for 2024? The JP Morgan top five.

I think we will certainly see deal activity in pharma and healthcare. Secondly, financial services. Also tech and technology. You may see smaller deals, but I think once they start turning profitable, they would want to go to the public market to raise funds because a lot of them are waiting to go and raise money from the public market. Energy and infra has been a space where there is a fair bit of M&A happening in any case. So I would pick these sectors.

My last query is on a personal note. You're a fitness freak, an avid marathon runner and that's not all, you have also completed a lot of Ironman events. What advice would you give to young deal makers and investment bankers who are sometimes exposed to situations where they have to work long, grueling hours, with sleep and healthy food taking a backseat?

This is closest to my heart and till the age of 35- 36, and I'm 52 now, I was pretty much only working and was doing very little for my health. And that is when I realized that if I have to really sustain a long journey in any career that I take up, health is first. We all have to put in long hours and sometimes put in late nights.

But I always keep telling everyone who say that they have a lot of work and are working till late and have a call at 11 pm or midnight, that on 9 or 10 occasions, you will find that if that call can be moved to the next day, it should be fine. So at that time, we are not servicing our profession, we are servicing our insecurity. Because we always feel that, look, if I don't do this, what will my client think?

So you sleep early, and if you get up early, and you finish your work and send it to the client early in the morning, it's fine. So as long as he or she has got it before waking up the next day, he or she doesn't have to get it at 2 am in the morning, they can get it at 7 am in the morning.

You can get up and do it. And you're more efficient when you're doing all these things. I feel it's actually a virtuous cycle. If you sleep well, eat well, exercise well, you are more productive, more efficient, more of a clean thinker, clients love you and because you're a clean thinker, you solve problems, you solve problems, you do deals. So I think it's a nice virtuous cycle you can get into. If you're not into that, you get into a vicious cycle.

So respect your body and don't think that your clients will always get ticked off?

Yeah, exactly. In fact, clients value it. They like the fact that apart from work, you have something that you can share and talk about with them. Health is important for everyone.