In light of the India rising story, Mr. K. Mahesh, Head - Corporate Advisory Services, IL&FS Financial Services Ltd., provides insight into the Merger and Acquisition activity and trends that are potentially visible in the domestic and global market

The strengthening of the economic situation of India, has positively affected local and global sentiment. However, volatility in economic environment led to muted mergers and acquisitions (M&A) activity. Considering that India has now acquired a prominent position on the investor list, industry experts are anticipating a potential jump in M&A deals in India and cross-border.

M&A is a function of corporate confidence, global economic situations and increased competition. While the future of M&A activity or waves is difficult to predict, given the economic climate in India and the Government’s focus on transforming the industrial landscape to be more investor friendly, M&A and equity capital raising trends are likely to witness a bounce.

M&A and Equity Capital Raising Trends:

Recovering from sluggishness in volumes witnessed in 2015, the current fiscal year witnessed a bounce back in the M&A and PE activity with transactions worth US$27.3 bn YTD and anticipated to cross US$ 30 bn during the full fiscal as per industry estimates.

Infrastructure & allied services, IT&ITES and the Banking & financial services dominated the M&A deals landscape during the year, while Service centric companies have emerged as favorable areas for PE investors. The real estate sector has become a recipient of renewed interest from financial investors while Technology start-ups and ITeS companies continue to remain a preferred area of investment. In 2015, the start-up industry received an estimated $4.9 billion – up a whopping 125 per cent from the previous year.

The increase in financial sponsors led capital infusion in the current fiscal signifies the resuscitation of institutional confidence in the economic climate in India. The Government’s 'Make in India' initiative that seeks to convert India into a global manufacturing hub has gained significant visibility among overseas investors.

As the country's economy shows slow but steady growth, backed by a stable Government at the Centre, growth in Inbound M&A and private equity deals is likely to continue as companies seek to participate in the growth wave of one of the largest and fastest growing Asian-Pacific markets. Most of the inbound capital is likely to flow in from USA, Europe and Japan where investors have the requisite appetite to participate in India’s growth story.

Supporting Pillars for growth in Deal Activity:

India outpaced China as the world's fastest growing economy in 2015 and is expected to clock 7-7.5 per cent growth in 2016 provided the reform momentum continues and the business environment improves. Continued consistent growth in the GDP supported by a robust domestic consumption story will further augment the inbound M&A activity.

Government’s renewed emphasis on developing infrastructure through greater public outlay, encouraging private investment in the sector and fiscal reprieves such as the 5:25 flexible structuring scheme as well as the Ujwal Discom Assurance Yojana (UDAY) for restructuring debt of infrastructure and power distribution companies respectively are additional factors that will drive the deal activity in the years to come.

Enhanced foreign investment in crucial sectors such as defence, railways and infrastructure with the opening up of these for foreign capital infusion will help strengthen the Indian balance sheets and aid in the creation of a more robust infrastructural framework.

The banks actions on bad loans is set to spur a slew of mergers and acquisitions after RBI allowed lenders to take control of defaulting companies and sell assets to recover dues. Lenders have already started converting debt owed by firms into equity under the strategic debt recovery mechanism.

The 22-month old government has undertaken several initiatives to make India an attractive investment destination with the Prime Minister having travelled to several countries garnering interest among foreign investors.

Dampeners to Deal Growth:

Certain factors that the industry needs to watch closely include passing of the GST legislation and the revised Insolvency and Bankruptcy Code, which are aimed at ease of doing business in India. Any significant negatives in this regard are likely to impact the investor sentiment adversely.

The RBI has its role cut out in to manage inflationary pressure and money flow as the Government has signified its intent to achieve the fiscal deficit goal of 3.5% for FY 17. Rising Non Performing Assets for Indian Banks might impact the lending and growth in the near term. Other macro-economic factors to watch out for include hike in fed rates by US, impact of the Chinese economic slowdown on the global economy and cyclical factors such as impact of monsoons on the agricultural production, imports etc.

Conclusion:

In the last 2-3 years, there has been a lot of investor interest in IT, ITES, e-commerce areas, but India has seen a slowdown in the economy in areas like infrastructure, construction, real estate etc. In the next couple of years, there may be move back to the traditional long term investment sectors like infrastructure, e-commerce, consumer financing, NBFC, pharmaceutical, healthcare, technology etc., which has been gaining attention from investors.


As shared with IFIN Panorama Editorial Team



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