The mergers and acquisitions (M&A) landscape in India is evolving rapidly, influenced by various economic and geopolitical factors. As we move through 2024, it is essential to understand the trends in deal-making activity, the impact of RBI's interest rate decisions and the broader investment landscape. In an exclusive interaction with Moneycontrol, Nandini Chopra, Managing Director with Alvarez & Marsal Corporate Finance talks about the themes that are impacting M&A activity and how they shape corporate fundraising, valuation trends, and private capital expenditure.
Edited excerpts:
What is the outlook for M&A and impact of rate cuts on dealmaking activity?
While 2023 saw a drop of 40 percent (by volume) in M&A activity, compared to the boom of 2022, we see a revival in 2024 with companies and sponsors looking for new growth opportunities. The RBI did not make any immediate rate cuts earlier this month, despite industry expectation, treading a fine balance between inflation and growth. However, over the last 24 months or so, we have witnessed a 250 bps rate cut and an average annual GDP growth rate of nearly eight percent.
Lower borrowing costs, against the backdrop of potential rate cuts, could see more capital expenditure as also inorganic growth with both strategic and financial players participating in increased M&A. PE firms continue to have considerable dry powder with more focus than ever before on India as compared to China.
In this context, how do you expect the China +1 theme to play out?
More than the China plus one theme, I see the fundamental “Make in India” initiative gain momentum, whether for a self-sufficient economy or for adding capacities for the rest of the world. Large investment programmes are on the cards for local conglomerates, mid-size companies, as also PE funded businesses.
There are two sets of geopolitical dynamics that will benefit Indian investments - US-China playoff as US derisks from dependencies on Chinese manufacturing (China plus one) and the India-China face off with Press Note 3 continuing to impact Chinese new and follow-on investments in India.
Also Read: India should chart own course, following a China-plus-one strategy is flawed: Mahindra's Anish Shah
What's driving corporate fundraising activity as you see it currently?
There has been a surge in investor optimism fuelling Indian corporates' fundraising activity. Several global PE funds have been steadily increasing their allocation to India and some have even designated it as their largest Asian market. This strong vote of confidence from these large experienced investors reflects their bullish outlook on the Indian growth story. PEs are allocating funds in certain key sectoral themes such as renewables, healthcare, consumer and certain industrials.
In addition, with NPAs at an all-time low, banks have also started deploying capital for expansion and new projects in steel, cement, electronics, chemicals, pharmaceuticals, and oil and gas sectors.
On a smaller scale, we are witnessing DFIs funding ESG ventures from microfinance to recycling and sustainability. These themes are likely to gain momentum with increased focus on self-regulation driven by corporate responsibility on climate change, as well as Government regulation on extended producer responsibility (EPR) norms.
How is A&M positioned to offer the right solutions to clients?
At A&M, we differentiate ourselves by focusing on value creation for clients and supporting them throughout their entire lifecycle. This comprehensive approach, encompassing strategy consulting, deal origination and execution, all types of diligence, post deal integration and performance improvement and to even turnaround situations. This allows us to develop an unparalleled understanding of our clients' needs and ability to optimise value for them through significant periods of change.
Alvarez & Marsal has been building a corporate finance franchise with seasoned professionals across the Americas, EMEA, and APAC. The India team has been around for over a decade focused on growth, special situation and stressed asset deals across M&A and capital raising. (what is special situation)
Also Read: Alvarez & Marsal plans big bet on India; to grow senior team 3x in next two-three years
What is your view on valuations in the private and public markets? Do you feel it is sustainable in the medium to long term?
The public markets continue to remain overvalued - while corporate earnings have been healthy and are projected to continue growing, these gains may not seem to fully justify current valuations. Currently, the market is trading at ~21-22 times FY25E EPS, which is on the higher end of the spectrum. However, for many strong companies who can deliver the growth rates which have been baked into their valuation, current valuation multiples may well be justified. High valuations in core industrial sectors indicate confidence in the manufacturing potential for India.
The markets are also likely reflecting the continued third term and the perceived stability of the Government. It is on the back of significant GDP growth rate on a huge demographic base where both rural and urban demand continues to remain robust for all sectors. India is clearly an asset class on its own.
Do you feel private capex is turning the corner? Is yes, can you underline the key sectors and themes driving it?
Over the past few years, capital expenditure has primarily been undertaken by the government due to limited participation by the private sector. The proposed capital expenditure in the interim budget of 2024 showed an increase of 11 percent in capital expenditure to over INR 10 trillion.
We see average capacity utilisations of 74 percent indicating that corporates will need to incur further capex to expand capacities. Strong earnings coupled with healthy balance sheets and access to low-cost capital provide corporates the required impetus to undertake large expansion projects.
Private companies are expected to increase their investments towards the end of this fiscal year. Manufacturing, industrial, and power sectors are likely to lead this growth.
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