“We stay away from places that have impossible governments and impossible tax regimes, which means Sayonara to India,” said TPG Capital founder partner David Bonderman tearing into the country’s investment attractiveness recently. Bonderman, among the most influential private equity investors, said publicly what his peers quipped behind the scenes: India is possibly the least attractive of the emerging markets for private equity, right now. – June 26th, The Times Of India
It was a damning pronouncement that had a depressing effect on the market last week. Top line numbers point to a shrinking investment size as the value of PE investments in 2011 amounted to a little over 10 billion, almost half of what it was in 2007- often referred to as the ‘hey day’ of Indian Investment banking.
2012 has not been any better. The second quarter has seen total deal value almost halve again to 8.12 billion (Cross border M&A, Domestic M&A, and PE/QIP) for the period April to June 2012. While Cross border activity was merely mirroring global economic situation, a significant fall in outbound activity suggests that Indian companies are hoarding cash, delaying inorganic growth and preparing for a rough ride ahead. Of course ‘Grexit’, Europoen Union worries could have also spooked Indian companies and stalled many a term sheet. Outbound activity fell from $4.26 billion in 2011 during the same period to $1.46 billion. The two big deals were Piramal’s acquisition of Decision Resources Group for $680 million and India Hospitality group’s (Jazz by the Bay owners) acquisition of Adelie Food Holdings limited for $350 million. It is the largest India –focused transaction in the F&B space since Tata bought Glaceau in 2006. It is a small spark of positivity in a sea of bad news because it reinforces the buying power of the urban middle class.
If only investors outside the country felt the same. Structurally high food inflation, high interest rates, slowing GDP, and poor governance and policy paralysis have contributed to an under-whelming outlook for India for the short term, causing foreign entities to put their India investment plans on hold. Still, the largest deal during the quarter was the $ 1.89 billion transaction of HSBC buying the retail and commercial banking businesses of RBS India. The BFSI sector is setting itself up for domestic consolidation as extended timelines to obtain branch licenses from the Reserve Bank of India by foreign banks, low banking and financial services penetration are piquing foreign interest.
The domestic deal space saw an increase of 26 % to $1.26 billion- the biggest contributor being Bharti Airtel’s acquisition of Qualcomm India for $165 million.
What does all this mean for Indian Investment Banking? Well we are an optimistic lot and tend to look at the glass half full. This could be the proverbial ‘dark before the dawn’ as valuations are now trading at historical lows. In June the Sensex was trading at a P/E of 12.3, and the pundits were calling it a bargain. On the flipside, a P/E is an indication of things so a contraction is essentially a pronouncement of a dismal future. There will always be buyers and sellers on either side of the fence and what matters is whether the transaction is strategically sound at the said price.