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How Indian businesses are evolving M&A strategies
November, 06th 2017

M&A heads and CFOs of leading Indian business houses discuss, at Mint Dealmakers Forum, how the macroeconomic environment in the country is impacting M&A strategies

At the first edition of the Mint Dealmakers Forum on 22 September, M&A (mergers and acquisitions) heads and chief financial officers (CFOs) of leading Indian business houses discussed the macroeconomic environment in the country, the stressed assets opportunity and technology disruption, and their impact on M&A strategies.

Panellists included Navin Wadhwani, head (M&A) at Reliance Industries Ltd; Sushil Agarwal, group CFO at Aditya Birla Group; Sanjay Jain, group CFO at Future Group; Pramod Menon, board member and group CFO at RPG Enterprises; Ramesh Swaminathan, CFO and executive director at Lupin Ltd; Pritesh Vinay, vice-president (capital markets and group investor relations) at JSW Group; and Nishant Parikh, partner at the law firm Trilegal. The discussion was moderated by Shrija Agrawal, national deals editor of Mint. Edited excerpts:

How do you see the current macroeconomic environment in the country? What are the good, bad and ugly in the economy today? Do inorganic opportunities make more sense now?

Wadhwani: There has been a slowdown in the GDP (gross domestic product) growth rate over the last couple of quarters. It is expected that there will be a similar slowdown in GDP growth rate over the next few quarters, largely because of the reasons such as demonetization and GST (goods and services tax) implementation issues. These implementation issues will have some short-term effect on the growth rate.

Having said that, from the long-term perspective, there are a lot of good things that have been put into place and that will start showing results. GST is a structural reform and will start showing results in the next six-nine months. Secondly, RERA is good for the real estate sector and it will put a lot of impetus on affordable housing. Third is the Insolvency and Bankruptcy Code (IBC). {RERA stands for the Real Estate (Regulation and Development) Act}

As far as the M&A strategy is concerned we need to stick to the basics. Basically, it is a call on “build versus buy”. Is it cheaper to build or is it cheaper to buy because in India there is no issue with growth. So when I am evaluating an acquisition will always ensure that one is not overpaying.

Secondly, any M&A strategy has to be developed with your organic strategy. The third element is to stick and play to your core strength. I think a lot of business houses that over time diversified, have had their challenges and are coming back to focus on their core businesses. The last bit is leverage. I think a lot of time people overleverage. I generally believe that all M&A professionals have a responsibility to protect and preserve the balance sheet.

Swaminathan: There are lot of positives in the economy today like GST, RERA, IBC, and a host of other initiatives notably Jan Dhan, Aadhaar and mobility. These would be good for us in the long term. However, in the near term there are challenges such as private investments and consumption. If you take the current context, there are four engines of growth, namely (in descending order), government expenditure, private expenditure, private consumption and exports. Except for government expenditure, other three engines are not firing at all. That I think is the first step that the government should be taking to revive the economy. So there are lot of prospects and lot of room for optimism but at the same time there is lots to be done by the government itself.

Except for govt expenditure, other three engines (private expenditure, private consumption and exports) are not firing at all. That I think is the first step the govt should be taking to revive economy.
- Ramesh Swaminathan, CFO and executive director at Lupin Ltd.
Sushil, for the Aditya Birla Group, in the current macroeconomic environment, is it buy or bid? And will we see a major acquisition like Novelis again any time soon?

Agarwal: I think there are opportunistic situations, and across the group over a period of time, in the last decade, we have done multiple acquisitions which would range around $15-16 billion in different sectors. It can be as large as Novelis, which is $6.5 billion, and it could be as small as Rs200 crore. I think you have to go back to the basics and look at what you need from each particular sector. One is buy versus bid and then there are areas where sometimes you don’t have a market presence and you might want to acquire something.

Like in the case of Jaypee, we were always looking for an opportunity in the central Indian market as it was a missing gap in our portfolio. I think we will always remain hungry on a situation like that. We just did a mega-merger in telecom given what is happening in the sector and it was the right thing to do from a consolidation point of view. We just concluded a big restructuring within the group, which has resulted in huge value creation for shareholders.

The new IBC and the huge quantum of stressed assets out there in the system, how do they fit into your M&A, inorganic growth strategies?

Wadhwani: If one has to look at the stressed assets, in terms of broad numbers to give a perspective, the magnitude is around Rs 7.2 trillion of gross bad debts which have to be resolved. Of which around Rs1.78 trillion has been put to NCLT (National Company Law Tribunal) among the 12 accounts and then you have other 28 accounts that are likely to go to NCLT if the lenders don’t resolve it, and then you have SDR (strategic debt restructuring) and S4A (scheme for sustainable structuring of stressed assets).

There are various sizes and types of assets which are highly leveraged. I think there is a great opportunity for people to actually look at those assets. I think that will also create a great bit of private investment cycle. With NPA (non-performing asset) resolution, banks will be able to lend more and you will see a fair bit of capital expenditure; for the economy that will be a big benefit. One needs to look for things that are relevant to its own sectors and industry, be very-very selective to see how one can buy them at a price that creates value.

Agarwal: We are looking at it from two perspectives. One is from our core business perspective, if there are any stressed assets available either from our leadership point of view. If any business or opportunity on the stressed side provides us the opportunity to remain leader in that space, we will look at those. We will also look at it from a market point of view, if we have something missing in our portfolio, or if they give access to some key input, which one of our business requires. Second perspective is from financial services business where we believe that we are getting into an asset reconstruction business and we will see if there are assets available. These are two different things. However, over a decade we would have done around $15-16 billion worth of acquisitions. So, we were not waiting for this moment to come and only acquire during the stressed time.

Jain: We have evaluated opportunities to take forward our business objectives... From a difficult balance-sheet perspective, Nilgiris, which we acquired, is one example. The asset was struggling, but it was a strong 100-year-old brand in the south. The motivation for us was that we are getting a strong dairy brand and getting an immediate access to 140 convenient stores in cities such as Bengaluru and Hyderabad. Our assessment was that by correcting the liability structure of the company, extending the brand to many more categories and taking it across our stores one could multiply the revenue and earnings, and eliminate the stress.

We were also in a situation of little bit of stress on the balance sheet. So to perform M&A alongside handling your balance sheet as well has been an interesting task in hand and our shareholders have seen us doing that successfully. When we did Easyday acquisition from Bharti, we didn’t write a cheque to buy them out; we made them believe that together we are going to create value. The market cap was close to Rs6,000 crore and today the market cap of Future Group is Rs26,000 crore.

If any business on the stressed side provides us the opportunity to remain leader, we will look at those. We will also look if we have something missing in our portfolio, or...access to some key input.
- Sushil Agarwal, group CFO at Aditya Birla Group.
Vinay: It boils down to the ultimate business strategy that you are pursuing and what are the different legs which will be the enablers to pursue that strategy. For us organic growth is a big resounding yes. Inorganic growth, from a stressed assets perspective, is an opportunity, and we have gone public in the past that we will be actively scouting but that does not mean at any cost.

You realize as you grow that you are in an industry that is deeply cyclical and capital-intensive. You can get near-death experiences if your balance sheet is not correct. Then you get down to a mode that can I calibrate my strategy in such a manner that I will be able to derisk the balance sheet regardless of where you are in the cycle and yet pursue those growth opportunities. So ultimately it boils down to value creation.

Technology has emerged as the biggest disruptor across sectors, in the last few years. How does technology disruption fit into your M&A strategies, impact them?

Wadhwani: Technology is the biggest disruption in this era and all corporates are very seriously looking at it across the spectrum. It is not just one sector and it is across sectors. One needs to look at its own sectors, look at how they would apply to India and then devise the strategy. However, each market is different and I think that India will react in a different way as what US or Europe would react. In e-commerce, just as an example, I feel what will win eventually will be the omnichannel. So there will be bricks and mortar, there will be online. I think both will work. One needs to have strategies around online and modern retail, and try and work on it and build on that. But just to rely only on putting in capital and giving discounts to enhance e-commerce site sales, not sure if that strategy would work in India. In my view, every corporate is monitoring technology evolution closely and these rapid changes are likely to keep everyone on its toes as far as technology disruption is concerned.

Menon: In terms of manufacturing, on the tyre side we are seeing a lot of technological revolution taking place, which is cutting down on cost, time and also improving efficiency. What we are looking at a lot of is tuck-in acquisitions. While one will have to wait and see how these technologies pan out but at the same time we don’t want to miss the bus. So a lot of things are being done home-grown and couple of these capabilities are something that is getting acquired.

In our IT business, today we are shifting away from legacy-related business to more digital-related business. Over the last couple of quarters, we have done two acquisitions on the technology business side, which were primarily to boost the total amount of digital revenues.

Agarwal: From a digitization point of view, businesses like financial services throw up a lot of opportunities and we are making a lot of investments in each different verticals of the business and even at an overall business level, because we have nine million customers sitting in that business. There are huge opportunities we can tap, such as opportunity in asset management business.

For us organic growth is a big resounding yes. Inorganic an opportunity, and we have gone public in the past that we will be actively scouting but that does not mean at any cost.
- Pritesh Vinay, vice-president, (capital markets and group investor relations) at JSW Group.
Given the changes in regulations, how has the role of lawyers as advisers to M&A transactions changed over time?

Parikh: If you look at things in today’s context, especially in the last three years, a lot of new things have happened, such as the real estate and insolvency law. There are big structural shifts happening as well. What’s happening is that in many ways post-liberalization, this is now a phase where ultimately the market is growing up, it’s becoming more sophisticated and with sophistication you will see a great deal of complexity. Complexity not just in terms of how you deal with laws and regulations in deals, but also in how you assess risk in a transaction. You can only access risk in a transaction as a lawyer if you have got either sectoral expertise or you got some legal expertise relevant to that deal, and increasingly you find clients looking for that specific ability. It makes a great deal of difference to any transaction if you bring the right set of experts on that, not just to assess the risk but to also characterize risk in the right manner.

The market is becoming more will see a great deal of complexity. Complexity not just in terms of how you deal with laws, regulations but how you assess risk in a transaction
- Nishant Parikh, partner at the law firm Trilegal
Ramesh, as a group Lupin has done ambitious acquisitions like Gavis. In the light of Donald Trump’s presidency and the talk of repealing Obamacare, what is the view on acquisitions? Will the group continue to chart its ambitious M&A strategy and will it be mostly focused on overseas markets or are you also looking at opportunities within India?

Swaminathan: In pharma, you do research on few things but at the same time you buy lot of stuff as well. We would continue to buy, we will be looking at speciality in a big way, mostly outside of India. When it comes to acquiring in India, the fact of the matter is that a lot of these assets are still being owned by first- and second-generation entrepreneurs and they would not, for sentimental reasons, part with those. They would like to believe that it is lot more valuable. That said, we would look at assets in India but for sure we will be looking at assets across the globe, more particularly in America because it is the largest market in the world and if you are going to be big in speciality, you might just start with the biggest market in the world.

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