Investment bankers face rough weather

For the Indian investment banking community, the first six months of 2013 were a tough ride, with very few big-ticket deals being announced till date.

Barring a few marquee deals like Apollo Tyres’ acquisition in the US and Unilever’s $5-billion plan to increase its stake in Hindustan Unilever, bankers say the rest of the year is going to be a washout.

“The outlook for the mergers & acquisitions market is weak and we will see limited activity unless the economy shows some strength and the macro-economic situation improves.

“Given the weak domestic economic environment and a consequent need to preserve cash and low market valuation, the outbound M&A activity will be low,” says Pramod Kumar, managing director of Barclays Capital.

In the first six months, outbound deals from India fell to $5.7 billion from $13 billion but the inbound deals grew to $12.7 billion from $5.5 billion -- mainly to Unilever’s plans to increase its stake in its Indian subsidiary to 75 per cent.

Qatar Foundation’s plans to buy a five per cent stake in Bharti Airtel was a big investment by a foreign company in India. Ajoy Lodha, partner at Singhi Advisors, says, “Indian businesses are under pressure and sentiments have turned towards caution.

“With growth rates coming down, businesses are wanting to be careful of using cash conservatively and wary of excessive leverage. “This trend is likely to continue in the next six-12 months, as no major policy initiatives are expected until after the 2014

elections.

“Positive sentiments are important for initiating acquisitions.”

“OVL-Oil India’s plan to buy out Videocon’s stake in a Mozambique gas block was another big ticket transaction in India even as Etihad’s $380-million investment in Jet Airways is awaiting the Indian government’s clearance.

Among the outbound deals, Apollo Tyres’ surprise $2.5-billion acquisition of Cooper Tire & Rubber Company resulted in its investors penalising the company by selling its shares in the stock markets.

The Apollo Tyres stock is down 37 per cent since the deal was announced a month ago.

“These are the pitfalls of a M&A. Investors don’t like an acquisition which will be funded by debt. Investors do not see any synergy benefits at a time when demand is falling abroad,” said a banker.

For the rest of the year, bankers say the transactions will be far and few.

“We might see some outbound M&A activity in the natural resources sector, but that too will likely be limited to players such as ONGC/OVL and large and financially stronger private industrial groups,” Kumar said.

Apart from M&As, there were few initial public offerings since January this year apart from a few follow-on offers in which Indian companies cut their stake to 75 per cent to meet Securities and Exchange Board of India regulations.

“Many big sized IPOs are waiting for the markets to improve but barring Just Dial’s IPO, there are not many success stories this year,” a banker handling IPOs said.