Eurozone impact on India Inc

Over the past decade, Indian companies have been amassing assets across Europe. Since 2006, Indian firms have spent $37.9 billion on European acquisitions, according to data gathered for Business Line by Dealogic.

Britain is by far the largest target market with some $22.6 billion's worth of M&A in the past five years, and Germany a distant second ($3.3 billion): though acquisitions in markets from Romania to Ireland, and Spain have reached the 100s of millions, in sectors ranging from metal and steel ($13.1 billion) to healthcare ($1.6 billion) and the automobile and truck sectors ($4.2 billion)

This exposure has, of course, left them vulnerable to the impact of the euro zone crisis. According to a recent FICCI study of Indian firms that do business in Europe, three quarters had experienced a loss of business from Europe of between 10 and 15 per cent while half said that the crisis was impacting their business prospects in the region. The survey encompassed sectors ranging from chemicals and IT providers to textile and construction firms.

DEMAND SLUMP

Tata Steel, for one, has been candid in its outlook for the European market, and its European division — formerly Corus — which it acquired for $12.1 billion in 2007. For the quarter ending September, EBITDA for the European operations was down nearly 43 per cent on the year before.

“Like other steel companies, the euro zone crisis is affecting us because steel demand and pricing are under pressure,” said a spokesperson for Tata Steel's European operations this week. “Europe's steel industry is caught in a cost price squeeze with weak sales markets and historically high raw material prices.” Analysts aren't expecting steel demand in Europe to pick up until the second quarter of next year.

Dr Reddy's Laboratories, which acquired German generic drug maker Betapharm Arzeneimittel for 480 million euros, recently said that it expected its European operations — which contribute just over around 10 per cent revenues — to continue to weigh on the group's results for the next three years. In the most recent quarter, revenues from its main European market, Germany, fell by 27 per cent and by a total of 10 per cent across Europe. The group took a significant write-down on the asset in the last fiscal year.

At the same time, Indian firms do appear to be adapting to the times with relative promptness.

COPING WITH CHANGE

Tata Steel, for one, has been swift to respond to the crisis, becoming one of the first steel producers in the region to react to the latest decline experienced by the steel industry starting in the second half of the year. It chose to idle a blast furnace at its Scunthorpe site in the UK back in May, cutting 1 million tonnes off its effective capacity. In the past couple of months it has also temporarily mothballed a hot strip mill, and closed its British construction products division.

“They reacted as quickly as they reasonably could,” says Chris Houlden, a steel analyst at metal and mining consultancy CRU in London.

Others have been similarly responsive. Last year, Dr Reddy's Laboratories launched a restructuring of Betapharm, which includes transferring the manufacturing of products back to India, and other cost-cutting measures.

Sylvania, a European lighting firm bought by electronic equipment maker Havells India for $300 million in 2007, first made heavy losses, but returned to profitability at a net level in the quarter ending June, after the company embarked on a restructuring programme, cutting costs and concentrating on new markets, emphasising Latin America and Asia rather than just Europe.

And, of course, Jaguar Land Rover: the company that went from being viewed as that over-expensive trophy purchase for Tata Motors, to a profit driver. Ian Fletcher, an auto analyst at IHS Global Insight, who was originally optimistic about the deal recalls fearing the firm had bitten off more than it could chew when the market went into free fall in 2008-2009. “There was an 18-month period when things were shaky but they held it together,” he says. Launches such as Evoque are expected to help support demand in Europe, as should its push into China. (However, JLR isn't immune: the division's profits for the quarter ending September fell 2.1 per cent — despite a rise in sales — as a result of currency changes.)

MIXED PICTURE

Another firm to strike a positive note about the European market is Apollo Tyres, which bought Dutch firm Vredestein back in 2009, and which recently reported an increase in sales driven by demand in Europe. It has said it is planning to increase production at Vredestein, as well as increasing its exports of its own brand to Europe.

The Suzlon Group, which acquired German wind turbine maker REPower Systems in 2009, and gains just under half of its revenues from Europe, also remains extremely optimistic about demand. It expects a compounded annual growth rate of around 25 per cent in its three main European markets: France, Britain and Germany. “The growth we are witnessing in Europe, especially in Germany, France and the UK, is likely to remain for some years ahead. Additionally, the EU's targets for climate change mitigation ensures that the demand for renewable energy will remain,” said Mr Tulsi R Tanti, Founder and Chairman of Suzlon Group in an e-mailed response.

With the recent weakness of the rupee adding pressure on those that have borrowed heavily to fund their foreign acquisitions, it would be just as wrong to be overly positive about the way Indian firms with subsidiaries in Europe are coping through the crisis, as it would be to be overly negative. “Indian firms are approaching this in an entrepreneurial way and looking at it with fresh eyes. Their attitude is: we have come here and want to make a go of it,” says Deepak Lalwani, Director, India at London consultancy, Lalcap.

What does seem to have gone is the lust for European assets. Unsurprisingly, the rate of acquisitions has slowed down markedly in the past five years: in 2009, Indian firms spent just $466 million on European acquisitions, and at $2.9 billion for the year to date, it still remains a long way off the levels of 2006-2008.

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