“India Inc wants to take big, inorganic bets” | Daily News Byte

How do you see the development of M&A activity in the coming year? Will companies fight back against PE funds sitting on large amounts of dry powder?

Indian M&A is $175 billion in 2022 YTD. Private equity and venture capital contributed about $65 billion of this number, and the balance was mostly Indian companies merging with or acquiring other companies in India. This shows that the Indian corporate sector is looking to take big inorganic bets to increase its market share in the growing economy.

Going forward, there are three themes that will drive M&A in India: A play for scale and dominance, to capitalize on disruption and ultimately, a shift to more sustainable business models. Big Indian conglomerates will continue to play for scale and size and are willing to pay a premium as greenfields become increasingly expensive. Structural reforms such as ONDC (Open Network for Digital Commerce), OCEN (Open Credit Enabling Network) and digitization of the logistics sector will challenge old business models. This will also lead to consolidation in physical and online business models to provide an end-to-end solution to the consumer. The transition to sustainable business models in the field of energy and electric vehicles will lead to numerous opportunities. Indian companies with their strong and well-capitalized balance sheets are aggressively looking at consolidation themes in existing sectors and looking to enter new sectors. For example, Vedanta formed a joint venture with Foxconn to enter the semiconductor sector, while Adani bought Holcim’s assets in India to enter the cement sector. I see a 50:50 split between corporates and private equity in the M&A game over the next few years.

Given the slowdown in tech funding, do you see a wave of consolidation in the sector in the coming days?

Yes, the tech sector should see consolidation with big groups like Reliance, Tata, Adani, Flipkart acquiring businesses that have good business models but no money. We will also see consolidation within the sector with larger, well-capitalized companies buying smaller companies that have a differentiated business model, customer set or unique technology but need capital.

Fintech will lead the wave of consolidation as financial services require large amounts of capital to serve the Indian diaspora. With the launch of OCEN, existing banks will face disruption as lending becomes more cash-flow driven, and this will also lead to the possibility of mergers and acquisitions. With the launch of ONDC, the e-commerce sector will face disruption as more businesses shift from unbranded to branded segments and more sellers and buyers meet on a neutral platform. This will lead to acquisitions and consolidation in the retail sector.

The pharmaceutical and healthcare sectors have seen an increase in buyback activity post-covid. What is driving this rush of asset sales in these sectors?

The Indian generics industry is a $100 billion factory in the world and is expected to grow by double digits annually. In addition to the export of generic drugs to the world, the domestic formulation market is also growing rapidly. With the pandemic and the launch of the Ayushman Bharat Digital Mission, healthcare spending will increase. Governance is high in this segment and government intervention is low. Therefore, private capital has and continues to invest in this sector.

Infrastructure, through renewable energy sources and roads, continues to attract large sums of capital. Do you see capital flows in these sectors remaining strong in the coming year? What opportunities do you see in these sectors?

Infrastructure, renewable energy and roads will continue to attract strong capital inflows. The first reason is that structural reforms like GST and digitization of logistics will improve India’s economic activity levels, leading to improved infrastructure as fund managers look to invest capital in roads, ports and other infrastructure sectors.

Second, India continues to be an office in the world. With outsourcing spending expected to grow from $180 billion to $500 billion by 2030, we expect increased demand for commercial and residential real estate in urban India. This has led to large capital flows into the real estate sector from funds such as Blackstone, Brookfield and GIC.

Third, given India’s commitment to the Paris Agreement and improved energy transmission and distribution, we will see a rapid shift to renewables and increased energy consumption. Global strategists like Shell, Indian renewable energy companies and infrastructure funds like Blackrock are taking positions in this sector as they see an opportunity for growth in this segment.

While developed markets are worried about recession, Indian public markets have returned to their highs. Do you see public market sentiment as a challenge to valuations in private market deals?

I believe that a strong public market is positive for private market businesses. It gives private investors confidence that an exit can be obtained for their investments in the public market and that they do not have to rely on strategic investors only to provide them with an exit.

Of course, a strong public market may crowd out some private businesses, but given India’s current stage of development, we need strong capital inflows from both private and public markets.

As a boutique investment bank that has been active in India for over a decade, how has the franchise evolved and what is the firm’s medium-term growth strategy?

The Moelis franchise in India has evolved in line with the Indian economy. Previously, activity was limited to only a few sectors such as pharma, IT services and consumer, but as the Indian economy has entered a phase of accelerated growth, we are seeing broader dealmaking in sectors such as real estate, infrastructure, commodities, technology and others. So the job is deeper and wider.

Do you plan to hire more bankers in the coming year? In which sectors do you want to strengthen your team?

Moelis & Company is always focused on attracting top talent to help our clients and grow our business. That’s why we plan to continue to strategically hire as talented professionals want to join a global, collaborative firm like ours.