Friday March 9, 09:00 AM
India Inc. goes shopping! |
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By Equitymaster.com
It was not long ago that exports were predominantly the main recourse for Indian companies to move towards globalisation. The scenario has changed considerably over the past 3-4 years. There is a growing realisation within India Inc. that future growth will entail garnering a bigger pie in the world market, not only by producing and exporting, but also by acquiring overseas assets, including intangibles like brands and goodwill, to establish overseas presence and to upgrade competitive strengths in the overseas markets.
Globalization and non-discriminatory multilateral trade have opened new doors for Indian corporates. Earlier, there was an emphasis on inward flows - FDI, portfolio investments, joint ventures and collaborations to tap the growing Indian market, and also technology transfers for enhancing competitiveness of Indian firms. Phased liberalisation in the policy of overseas investments has enabled Indian corporates to establish presence in overseas markets on an unprecedented scale redefining the global outreach of Indian entities. Behind this push in overseas acquisitions lies a combination of forces - domestic economic buoyancy, competitive strength, access to credit, keen desire to achieve global scale and above all, confidence on their ability to add managerial value on a global scale. As per the RBI, the total value of Indian direct investments abroad was US$ 2.7 bn during FY06. A Boston Consulting Group report on the emerging multinationals in the world puts 21 Indian companies among the top 100 such multinationals. Only China with 44 companies is ahead of us.
The overseas acquisitions, which started of on a small scale, have reached to globally visible levels with big-ticket acquisitions being announced by large Indian corporates on a more regular basis.
| Year |
Acquirer |
Acquisition |
Value (US$ m) |
| 2007 |
Tata Steel (TISC.BO, news) |
Corus |
11,300 |
| 2007 |
Hindalco (HALC.BO, news) |
Novelis |
6,000 |
| 2006 |
Suzlon Energy |
REpower |
930 |
| 2006 |
Tata Tea (TTTE.BO, news) |
Energy Brands Inc |
677 |
| 2006 |
Dr Reddy's |
betapharm |
570 |
| 2006 |
Suzlon Energy |
Hansen Transmission |
520 |
| 2006 |
Ranbaxy |
Terapia |
324 |
| 2006 |
Tata Coffee |
Eight O' Clock Coffee |
220 |
| 2005 |
Tata Steel |
NatSteel |
486 |
| 2005 |
Tata Steel |
Millenium Steel |
404 |
| 2005 |
VSNL |
Teleglobe |
239 |
| 2003 |
Reliance (RELI.BO, news) |
Flag Telecom |
207 |
| 2001 |
Tata Tea |
Tetley |
431 |
The tempting overseas markets are expected to bring higher margins, revenue and volumes, besides opportunities for further growth and energy security. Some of the key drivers of the overseas purchases by India Inc have been:
Buoyant economy:Liberalised guidelines for overseas investment coupled with lower interest rate hitherto facilitated Indian corporates to invest on a global scale. The capex undertaken by Indian industry coupled with buoyancy in economy has strengthened the balance sheet of corporates enabling them to look for inorganic growth by way of acquisitions outside India.
Market access: By making global acquisition, Indian corporates are gaining entry into regulated markets of developed countries. The best example is the pharmaceutical industry, where Indian corporates equipped with USFDA approved facilities are looking for acquisition in the regulated market for ease of registration processes.
Advanced technology and different product mix: The manufacture of certain products requires technology that is not available to the Indian companies. By acquiring companies abroad, they also acquire advanced manufacturing technologies that further help reduction in the cost of production.
Energy requirements: Development of natural resources like mining and oil exploration has given an opportunity to Indian corporates to expand their wings in unchartered territories. Deployment of excess production resources or better yield on assets is another driving force.
Enhanced R&D capabilities: The post-quota regime has also given an impetus to Indian corporates to look for overseas ventures for enhancing their R&D and logistics to cater to developed markets. The Indian textile industry, with scalable capacities to cater to developed markets, is feeling handicapped because of logistics issue and delivery frame. However, with bases in and around the European and US markets, the textile industry is capable of meeting its commitments as well as going for high end designing studios to meet fashion requirements.
Meet onsite requirements: The IT industry has its presence across the globe by way of subsidiaries to cater to business in a particular region. The acquisitions made by IT companies are primarily for backward or forward value addition in their product profile as also for rapid client additions.
While there is great dynamism amongst Indian corporates to globalise, it is expected that, in the years to come, we will have more Indian 'multinationals'. These will include not only the large corporates but also small and medium enterprises. However, companies have to determine the most optimal method for funding these acquisitions as this has implications for the domestic balance sheets and external debt profile depending on the source of funding.
Indian companies appear to have so far balanced all these considerations and have raised bulk of these funds through LBO (leveraged buyouts) for large acquisitions, which reduces the risk on the domestic balance sheet. As regards external debt, the policy on external commercial borrowings (ECBs) allows borrowings for overseas acquisitions within the overall limit of US$ 500 m per year under the automatic route. The overall remittances from India and non-funded exposures should, however, not exceed 200% of the net worth. As per the RBI, this policy has served well so far.
The fact that can be comprehended from the above details is that while Indian companies are well geared to capture global opportunities, they need to have a calculated approach to the same. Investors, at the same time, must weigh the pros and cons of the deals before firming up their investment decisions.
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