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India pauses: Dealmakers take deep breaths after record run

Rising interest rates and an upcoming general election have forced Indian dealmakers to take a much-needed rest after frenetic activity in recent years.

Dealmaking volumes in India have fallen to the lowest level in the year-to-date (YTD, as of 19 June 2023) since YTD17 due to a slump in domestic deals in finance, technology and construction. The plunge was much larger than in other large Asian markets such as China, Japan or South Korea.

Total M&A activity sank to USD 31.4bn, according to Mergermarket data. This is down 74% compared to the same period in 2022, which marked a record year for M&A in the world’s most populous country. It is also 42% lower than YTD21.

The Reserve Bank of India raised its benchmark repo rate to 6.25% in December 2022 and again to 6.50% in February. This has hurt sentiment for dealmakers.

When HDFC Bank [NSE: HDFCBANK] announced the USD 61bn mega-merger with its parent HDFC Ltd to create the world's fourth-largest bank in April last year, the repo rate was just 4.00%. This was an all-stock deal, but any dealmakers thinking of using debt in similar-sized mega-mergers will have found conditions much harder in recent months.

Meanwhile, a general election is due in April/May 2024. Domestic deals will probably pause for breath in the runup to the election, according to Shinoj Koshy, a partner at Luthra & Luthra.

Financial services deals slump

The plunge in domestic deals was particularly noticeable in sectors such as financial services, which slumped to just USD 1bn from USD 65.6bn during the same period in 2022 as interest rates went up. Computer & electronics were also down by 83% to USD 2bn; while construction fell by 95% to just USD 548.3m.

The acquisition of a 17% stake in ReNew Energy Global by Canada Pension Plan Investment Board (CPPIB) was the only Indian transaction in the top 10 APAC deals in 2023 so far. CPPIB, which already owned 42% of the target before the deal, paid USD 268m for the additional 17% stake. However, the transaction is estimated to be worth USD 5.6bn when the full net debt of the target is included, according to Mergermarket data.

Other large deals since the beginning of the year include the Indian government’s acquisition of a 33.4% stake in Vodafone Idea for almost USD 2bn; and the sale of a 49% stake in GMR Airports to GMR Airports Infrastructure for about USD 1.8bn.

Lower valuations

The government is unlikely to undertake the divestment of more state-owned companies such as public-sector banks in 2023-2024, but new stake sales could materialize after the national elections.

On the other hand, the director of an Indian mid-market investment bank told Mergermarket predicted a rebound in dealmaking as lower valuations are likely to whet the appetite of buyers such as national strategic players with strong balance sheets – including Reliance Industries [NSE: RELIANCE] and Tata Group – as well as cash-rich private equity firms.

Tech is also likely to feature as India moves closer to the US following border clashes with China and Washington’s determination to shift at least part of its supply chains out of the world’s second largest economy. The signing of a memorandum of understanding (MoU) between India and the US for collaboration on semiconductors in March is seen as a catalyst for future M&A and partnerships.

Prime Minister Narendra Modi met with top executives from tech giants including Microsoft [NASDAQ: MSFT] CEO Satya Nadella as well as Alphabet [NASDAQ: GOOGL] and Google CEO Sundar Pichai during his latest state visit to the US. Reliance Industries' Chairman Mukesh Ambani and Mahindra Group’s Anand Mahindra were part of the Indian business delegation led by Modi.

Meanwhile, key Apple [NASDAQ: AAPL] suppliers based in Taiwan such as Foxconn [TPE: 2354] and Pegatron [TPE: 4938] are also seeking to expand their manufacturing footprint in India. Tensions between Beijing and New Delhi have the potential to upend the domestic smartphone market, so Indian M&A is unlikely to pause for long.

Analytics by Manu Rajput