Fortunately for India Inc, the impact of the Covid-19 pandemic has been minimal so far with timely policy measures, and the recent amendment in the Foreign Direct Investment (FDI) policy being a deterrent to hostile takeovers. While investors are keen to invest in the country, India is still two or three quarters away from witnessing a build-up in momentum, according to Mahesh Singhi, Founder and Managing Director at investment banking firm Singhi Advisors.
Singhi Advisors, a strategic partner and member of Mergers-Alliance (a network of 21 independent global investment banks), has advised multiple transactions worth billions of dollars in the last two decades.
In an interview to BusinessLine, Singhi says sectors such as chemicals, pharmaceuticals and building materials among others will witness an uptick in M&A activities, while certain others such as leisure and hotel would lag. Edited excerpts:
During the first half of the current financial year, FDI into the country rose 15 per cent to $30 billion. Do you expect this trend to continue for the rest of the year?
If you discount the investments into Reliance Retail and Jio Platforms, the numbers have a different story to tell. There is certainly a positive interest in investment in India but the country is still two or three quarters away from witnessing a build-up in momentum. The sectors where we expect good interest from overseas investors are pharmaceuticals, chemicals, metro rails and healthcare, while long-term investors would acquire income-generating assets such as renewables, tolling and pre-leased real estate among others.
With no substantial slide in market cap of Indian companies, is the recent amendment in the FDI policy, mainly to curb opportunistic takeovers and acquisitions, relevant?
It was anticipated that due to the pandemic, the market value of many companies in critical or sensitive sectors will crash, making them vulnerable to predators. That would have attracted hot money or opportunistic capital, but without any specific gains to the domestic market. However, this is no longer relevant as the market cap of most companies has not fallen substantially. The policy acted as a deterrent to hostile takeovers.
With many businesses expected to go belly-up following the pandemic outbreak, wouldn’t there be a proportionate increase in demand for stressed assets?
It was expected that the pandemic would lead to the creation of a lot of distressed assets. Fortunately, it did not happen. With the timely policy support, RBI directives on non-performing asset (NPA) classifications, moratorium on interest payments and withholding of Insolvency and Bankruptcy Code (IBC) proceedings helped companies buy time to recast operations.
All reasonably managed companies would have enough balance sheet resilience and holding capacity to weather bad business storms and unfavorable market conditions for a year. If companies have not built such reserves, they should either be ready to induct a partner, get re-capitalised or raise funds from market, rather than being a weak player. The pandemic will render many fundamentally weak companies obsolete.
How will the recent approval of Production Linked Incentive (PLI) schemes, Atmanirbhar Bharat and the expected formulation of a new Public Sector Enterprises policy impact deal-making activities?
All these initiatives will result in a need for capital, and investments will bolster economic activities. An increase in demand for inputs for industries such as steel and cement, need for labour and machinery, would help in kick-starting the investment cycle. With corporates starting to reinvest in building capacities and assets, the economy will take off.
Top pharmaceutical companies, who would have focused on formulations only, might now invest in Active Pharmaceutical Ingredients (APIs). As importing key material inputs from China would be a big risk, they (pharma companies) will also need to invest big time in securing their Key Starting Materials (KSMs).
Schemes like PLI and Atmanirbhar Bharat will lead to promotion of asset-building activities. When the country builds world-class assets, it will have to attain economies of scale and competitiveness to be able to sell in the global market.
For the rest of the financial year, which are the sectors expected to witness fast uptick in M&A activities?
The specialty chemicals, pharmaceuticals, APIs, building materials and agro-chemical sectors will witness an uptick in M&A activities. The building material chain comprising of minerals, wood panels, construction chemicals, paints and electrical will emerge as new segments for consolidation, apart from traditional sectors like pharmaceuticals and healthcare. Increased M&A traction will also be seen in sectors such business services, IT services, food and nutrition, auto components. Sectors comprising leisure, hotel, travel and entertainment will be laggards.