The equity market slump will not come in the way of overseas mergers & acquisitions by Indian companies, says T V Raghunath, executive director & head of M&A, Kotak Mahindra Capital, in an interview with Nevin John.
The M&A scenario looks grim. Do you agree?
At this point of time, we are not seeing any slowdown in inbound and outbound M&A activities. The aspiration of Indian companies to become global firms is soaring with the support of sound profitability and business experience. Most companies, which approach us for advice, have surplus cash in their balance sheets for acquisitions.
What kind of deals are possible in this environment?
Strategic players are active. Through strategic acquisitions, companies can synergise production and scale up their business. We can say the scene is favourable for relatively smaller deals by specialized players. Global liquidity crisis may affect big deals in future, though no such symptom has been seen as yet.
There is a perception that the market volatility has affected the valuations of Indian companies. What do you think?
Overseas players still find the country an attractive destination for expanding their business. The growing consumer base, the rising income level and macroeconomic growth are fascinating for any overseas strategic player. .
Do Indian companies look cheaper now?
The valuation of assets of strategic players has not changed because of their strong cash flow. However, the expectation of promoters has moderated because of the current market condition. This will help buyers to find reasonable valuation.
Which are the sectors that could see M&A activity?
We find activities across sectors, including financial services. After the credit crisis in the US, the value of firms in financial services has dropped substantially. This will help more deals in the sector. Otherwise, pharma, IT, engineering, auto, mining, metals and power are more prone to M&As.
Most companies are finding it difficult to raise funds after RBI’s measures to suck out liquidity. How will this impact M&A deals?
Not many Indian deals are funded out of debt from banks in India. If they borrow at higher interest rates, it will affect their bottomline growth. The high input cost and high interest rates will have a cascading effect on profitability. As the crude price has started moderating, inflation is expected to become milder. There are chances that RBI will revisit the interest rate after that.
Private equity firms consider India as a major market for expanding their base in the wake of a liquidity crunch. Many companies are considering diluting stake to raise funds rather than taking high-cost loans. How long will this situation continue?
PE funds’ investments depend on the cost of the equity. If valuation is reasonable, they will invest. On the other hand, we have to wait and watch to see how many companies will be ready to dilute equity for capital expansion.
Raising funds and expanding business was India Inc’s mantra till recently. What’s the new strategy?
The new mantra will be to improve efficiency and cut costs. Earlier, the focus was on headline growth. That should change to profitability.
What is your outlook on M&A deals?
Kotak is confident of future business flows. We are hiring more people for expanding our operations. Interesting opportunities await us.
