Sanjay Bhandarkar, managing director, Rothschild (India), tells Sumit Sharma and Abhineet Kumar that private equity investments may rise as much as 50 per cent this year, compared with $2.8 billion last year, as overseas investor sense opportunities for organic growth and valuations seem more realistic. Edited excerpts:
What kind of opportunities do you see in mergers and acquisitions (M&As) and financial advisory businesses this year?
We are seeing a lot of traction on the inbound. Many multi-national companies (MNCs) are coming into the country to buy control in businesses, or share it by way of partnerships. There is some selective amount of outbound M&As. We are also seeing a pick up on the private equity funding front. One will see a lot more deals. Though the level of deal closures does not match the level of activity, it will catch on.
What amount may come as private equity this year?
It’s very difficult to put up a figure, given the nature of the industry. But, one could see 40-50 per cent year-on-year growth.
Which sectors you think will see more activity?
We don’t see any single sector outperforming. Sectors like telecom are large. If something happens there, the deal size will be so huge that the value will become disproportionately large.
In terms of volumes, it will be across the board. Some action might be seen in telecom, power, healthcare, pharmaceuticals and industrials.
Sale of shares in the first half of 2010 is about thrice that in last year. Still, over the past few months, issuances have tapered off. What is your outlook for the remaining year?
We are not in the capital market, so it’s difficult to comment. It will be a function of volatility, which has clearly increased in the last two months due to global economic threats from Europe and the slowing growth in the US. It’s showing up in the moderation of appetite among portfolio investors.
We speak to investors with a slightly longer-term horizon — private equity or strategic investors. Since public markets are soft, it creates opportunities for deals, as alternative sources of funding would be required.
The capital market is unlikely to impact the real economy and growth will continue to be strong. Even if there is some volatility in global markets, the underlying conditions are strong, liquidity is easy and rates haven’t risen sharply. Hence, the economic impact should be limited and will set the stage for more long-term capital to come in.
Sumitomo Mitsui plans to buy a stake in Kotak Mahindra Bank. With Japanese banks holding huge surplus of money, do you see this as an emerging trend?
One could see that happening, especially with Japanese banks, which have enough money and need to go out, and less with the European and American banks, which may need to put their houses in order.
Do you see consolidation in sectors like banking, telecom?
Consolidation is inevitable in the telecom sector. When it happens, is a billion-dollar question. In banking, it could be marginal, except if the government decides it wants to consolidate public sector banking. One will see smaller deals in the private sector.
What do you think about bids at the recent telecom auctions? Were they too high?
It’ll be unfair to say that. The telecom players bid according to the markets. If one looks at the process, every player bid quite smartly. They all had balance sheet and budget issues, beyond which they didn’t want to spend. Within that, they managed to get circles important for them. The bids were more than the expectations, but to say they were very high will be unreal, because the 3G spectrum is valuable. The spectrum will remain uncontested for the next 20 years. For most operators, upgrading to 3G from 2G will be an incremental cost and won’t be a substantial capex. Plus, they will have other synergies coming in. The Indian telecom industry is moving back to the mindset of high average revenue per user (Arpu).
Moreover, it wasn’t just one company that was willing to pay that price. Four rational players with running businesses were willing to spend that much. And, they were some of the biggest operators and serious bidders, not mavericks.
With US and Europe economies not doing well, could we see more outbound M&As?
It remains to be seen if there are attractive valuations. They become attractive when economic growth slows, but one has to consider that any increase in global risks may impact the banking system and availability of finance for acquisitions.
Some capital market investors have found it difficult to convince themselves that it was rational for Indian companies to make acquisitions overseas, while they were coming to India to buy the India growth story. So, it may make sense only in some sectors.
One may see lot of outbound on the resources side — coal, oil and gas, because of economic uncertainty. If prices of these commodities drop, or if there is a need for capital and companies start shedding assets, one may see Indian companies go out and buy.
Outlook for domestic consolidation?
One will see some of that. Telecom will be one of the bigger sectors where one will see consolidation happening. Apart from that, there aren’t many sectors with a strong theme for consolidation. Media? Maybe yes, but most companies are small. The theme will stay in the information technology sector.
What are your growth plans over the next three years?
We plan to remain in the advisory business. We expect to grow faster than the market. We have 22 bankers across Mumbai and Delhi. Aspirations are more qualitative than quantitative. On hirings in the last cycle, we didn’t let anybody go, and made a few more appointments recently.
Which sectors are private equity investors focusing on?
Most private equity investors are sector agnostic. All of them are looking for opportunities in sectors that present scope for organic growth, and this may include most sectors in India. We don’t see particular sectoral trend or theme.
What is your outlook on exits?
Until 2007, a lot of exits used to focus on the capital market exits — block sales after a company’s initial public offering. Since 2008, a lot of exits have been made by strategic investors. The trend will continue. There is great interest from international strategic investors.
