In India, investing flows two ways
In the world of cross-border investing, it is India’s moment. The country has suffered less from the global downturn than many emerging market peers. Increasingly, Indian companies have the wherewithal and moxie to compete for global acquisitions. Meanwhile, foreign investors are taking a fresh look at India, encouraged by robust domestic demand and government policies that are actively encouraging foreign investment in some areas. India’s story is unique these days. Others in the BRIC (Brazil, Russia, India, China) group have been battered by global economic woes or beset by mounting corruption. In the eyes of investors, India’s resilient demand, business environment and governmental approach have allowed it to emerge from the pack.
Outbound. During the last 18 months, as Indian companies have acquired assets abroad, they have assumed a global profile. One sign of the times: some are appointing non-Indian executives to their management boards.
The March 2008 purchase by Indian automaker Tata of luxury brands Jaguar and Land Rover from Ford was one of the first transactions to demonstrate that Indian companies could be predators. In the US, Mahindra’s wholly owned tractor retail operation has rapidly gained market share, forcing established rivals such as John Deere to take notice.
Beyond the auto sector, Indian healthcare outsourcing company Apollo Health Street (AHS) has acquired two back-office businesses in the US since 2007. Chemicals and alternative energy companies could be next. Indian companies have used various forms of debt to fund the deals, although AHS recently announced plans for an initial public offering to cover its borrowings — a rare occurrence these days.
More than back office. Although India’s expansion has slowed somewhat over the past eighteen months, its domestic economy still posted growth of 6.7% in 2008 and is expected to grow by 6.5% in 2009 — good enough to continue its strong draw for global corporate majors and international private equity. Escalating consumer demand and government spending, particularly in areas such as IT, mean internal consumption accounts for around 80% of the country’s nearly $1 trillion economy.
Meanwhile, hot growth markets such as automotive supplies offer a potential lifeline for distressed foreign companies looking to aggressively trim costs. While back-office functions, call centers and outsourcing remain important, investments in manufacturing, retail and services are moving to center stage.
Its confidence growing, India has recognized the importance of not only permitting, but actively attracting, foreign companies into such sectors as infrastructure, where some $500 billion to $600 billion of new spending will be required over the next five years. The government has set more stringent parameters for investment in the sector, making tenders more attractive to large foreign majors and narrowing the field of local rivals.
In the highway sector, such actions have helped attract Italy’s Atlantia and Spain’s Albertis, among others. And the government’s privatization policy now requires international airport developers to be part of bidding consortiums. Even in the power sector, while qualifications required of investors haven’t changed, capital requirements are now so large as to act as a barrier to many Indian companies. The government allows 100% ownership in most parts of the sector, with the exception of existing airports and air transport services.
Growing up. The new opportunities have been matched by new sources of financing for deals. IPOs are reviving and domestic debt markets are showing new signs of life. Equally promising in recent years has been the emergence of home-grown private equity outfits such as ADAG.
Foreign investors still face difficulties. Due diligence remains a lengthy, sometimes convoluted process because of the lack of standardized systems, although the government is trying to formalize billing documents and contracts. Tax issues and approvals can pose obstacles. But these days, red tape doesn’t stop the deals as India comes of age.
Sharath Kumar •Ernst & Young LLP (US) •New York
Transaction Advisory Services
Ranjan Biswas•Ernst & Young LLP (India) •Mumbai
Transaction Advisory Services
