Low valuations set to perk up M&As: Experts

There could be a spurt in mid-market mergers and acquisitions ($50-200 million) in the next 12-15 months, led by companies who always wanted to be in India but could not afford it earlier, according to investment bankers advising buyers and promoters of Indian firms.

Last week saw two such deals. Sodexo, French food major, bought Radhakrishna Hospitality Food Services for Rs 520 crore, while American Tower Corporation is picking up Xcel Telecom’s telecom tower business, reportedly for Rs 700 crore.

“The correction in the market has changed the landscape. The valuations of Indian firms are in line with their global peers, which has improved the ability of foreign buyers to do deals in India. We will see more deals in the $50-200 million space in the next 12-15 months,’’ said Aditya Sanghi, MD, investment banking, YES Bank.

The valuation gaps were high earlier and have narrowed considerably as stock values of many companies have plummeted 75-80 per cent. So, a company which had a market cap of $150 million earlier is today valued at $40-50 million.

Many multinationals are thinking it’s a good time to participate in the Indian opportunity, says Equirus Capital CEO Ajay Garg. As growth slows at home, these MNCs have no other option but to look at markets like India. Many of them have strong cash flows and balance-sheets they can leverage. “Cash is God and not just king anymore. And they are the ones with cash,’’ said Ranjan Biswas, partner & national director, transaction advisory services, Ernst & Young.

“The private equity euphoria has slowed. Corporates are the real buyers. They have the cash, the strategic intent and ability to participate in a new market,’’ added Biswas. Unlike private equity players, who are still hesitant and have concerns on how will they exit, corporates are not worried and want to enter this market.

Nobody wants to sell cheap, but investment bankers say Indian promoters are willing to take a call if they see liquidity or a value proposition. “A promoter may have entered two new businesses in the last three years, which are cash-hungry. He may say, let me protect my mother business and exit the new ones,’’ said Sanghi.

It took promoters a while to reconcile. When the market began tanking in October, it took them two-three months to reconcile to the fact that the next 12-18 months would be difficult. They tried to save costs, drive efficiencies and productivity for another two-three months and realised that maybe it’s better to bite the bullet, explained a banker.

Some sellers may be sitting on some valuation expectations as there’s a hangover of rosier times, but as companies and promoters (pledging of shares could be a driver) get more stressed, there will be more deals, feels E&Y’s Biswas. The deals are being driven by buyers, and not sellers, as was the case 12-18 months earlier.

But don’t expect a deluge. The deals will be sporadic and will consummate in the next three-four months, picking up in the second half of the year. “The deal flow is strong, but closures are a little slower than you may like them to be. Decision-making slows in uncertain times,’’ said Sanjay Sakhuja, CEO-designate, Ambit Capital.

“The segment which is likely to see a larger number of deals will be small-ticket, domestic M&A activity, particularly as leverage in this segment was never a major factor,’’ said AP Verma, MD & CEO, SBI Capital Markets.

“We are also likely to see consolidation driven by balance-sheet stress. Companies will be seeking to shed assets as mobilising equity may not be a viable means of capital restructuring,’’ added Verma. Outbound M&As will continue to suffer as there’s no leverage in the market. Indian companies would like to conserve cash to sustain the downturn and focus on integrating the acquisitions already made.