‘The investment climate has improved significantly in the last six months’

In fiscal 2014, India’s mergers and acquisitions (M&A) across all industries clocked around $22.6 billion, according to an EY report, down 20 per cent when compared to the previous financial year. However, Mahesh Singhi, Managing Director, Singhi Advisors, is bullish about 2015. Speaking to BusinessLine , he said that with a new government at the helm, M&A will gather steam and brick-and-mortar companies will continue to lead the way. Edited excerpts:

How do you see the M&A scenario in India?

The investment climate has improved significantly in the last six months and investors are keen on investing in our country. These are interesting times for Indian companies.

The excitement phase started after Narendra Modi came into power with full majority. This was reflected firstly by the fact that the capital markets soared. Now it is the time for M&A deals.

A few weeks back, we saw the announcement of four major deals: Future Group-Nilgiris, Tech Mahindra-Light Bridge, Kotak Bank-ING Vysya, and JSW Energy-Jaiprakash Power. All these points to only good days ahead for the M&A industry.

Will this translate to more deals?

We anticipate many more domestic transactions to take place in the time to come, backed by higher FDI inflow in select Indian companies and rising market value of Indian companies, making them confident of offering higher valuations or ability to absorb the acquisition without losing market value (example, Ranbaxy-Sun Pharma, Elder Pharma-Torrent, and Natrol US-Aurbindo Pharma).

On the one hand, companies are locking acquisition deals even at higher valuation and, on the other hand, they are raising capital through relatively easy QIP (qualified institutional placement) route (example: Aurbindo raising $350 million after acquiring Natrol for $138 million, Astral raising ₹230 crore through QIP after acquiring Resinova for matching amount)

On the other hand, raising equity for acquisitions at higher valuations or equity swap could be the way.

Does this positiveness suggest strong fundamentals amongst a lot of Indian corporates?

Many of the deals have been going on for months and are only concluding now, giving an impression that the deal got consummated with the tide of good markets (as a result of good market sentiments).

But on a closer analysis, one can notice that quite a few deals were just liability transfer from one balance sheet to another (JSW-Jaiprakash, Adani-Lanco, etc), which have been going on for months.

You have opened a new practice around the technology vertical. Will you look at ecommerce deals in the future?

While ecommerce is growing, we are not too bullish about it as the valuations right now are sky high.

Also, these companies need to start showing profitability for investors to gain something on their investments.

Our focus is on technology that can make a difference in the Indian market or an Indian company that can make a major impact by developing a particular technology.

Which are the key sectors that look promising?

We see sectors which are under some stress, where liabilities/debt crossing 6-8 times of EBIDTA (as against acceptable <5 times) will see maximum activities.

The companies would be are overleveraged and finding ways to cut down debt (example, Lanco, Jaiprakash, GMR, Bhushan, etc).

The best possible option is to sell operational assets. Further, acquisition for business synergies and assets which are stuck in the hands of PE funds will also have better traction. Future Group-Nilgiris and Astral-Resinova are examples of such deals.

Apart from infrastructure, power, cement and retail sectors, which are largely debt ridden M&A transactions, we anticipate a number of transactions towards consolidation in IT, ITES, specialty chemicals, pharma and polymers.

Indian IT companies are cash rich and rupee depreciation is helping them further. They certainly want to acquire companies outside for expansion. With the Indian economy now at a critical inflection point, there are both new opportunities and new risks for M&A in China.

What was the overall deal value of transactions that you closed in 2014?

Total deal value on various transactions and advisory mandates we closed was $200 million.

Currently, we have a very healthy pipeline of domestic and cross-border M&A transactions across multiple sectors.

We are quite bullish on Indo-Japan, Indo-German and Indo-French corridors, apart from some consolidation-based transactions in the domestic market.

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