India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner & Leader/ Transaction Tax
Gautam KhetanAssociate Partner – Risk and Advisory Services
Post the general elections that were held in May 2019, the Indian economy was already treading a fine line, with its GDP growth dropping to a decade low. The global outbreak of the COVID-19 has exacerbated the situation by further negatively affecting economic growth
(At the time of writing) The impact in the number of affected people has not spiralled as rapidly as in the cases of the USA and many European countries, but that could be on account of insufficient testing across the nation. Considering the fact that India’s health services are not ready for a large-scale epidemic, one hopes that the outbreak is contained at this point. Already, the strain on the Indian economy is being severely felt.
The hit to India’s GDP growth rate is estimated to be significant; with the latest estimate closer to 2-2.5% against the already low projection of 6%, only a couple of months ago. Many sectors are likely to be deeply distressed; two of the largest employers, the real estate and automobile sectors which were already grappling, seem more afflicted. India’s winning story of services, that contributes nearly 55% to the GDP and provides jobs to millions, is likely to be deeply affected.
A sharp downturn in the revenue of the leading IT and outsourcing companies is likely. Anticipatedly, there would be new norms around global mobility as business models evolve to opt for internationally dispersed, localised workforces and automation of basic services with artificial intelligence. This could be a point of large-scale disruption for this critical sector.
Mirroring similar scenarios across most global economies, the Government of India and the Central Bank have up until now announced a stimulus equivalent to 4.3% of the GDP and more announcements are upcoming. In less than a fortnight, all economic parameters, such as inflation, production figures, creation of jobs etc. have become dated, leaving us staring at a bleak future along with the rest of the world.
Last week, the Finance Minister, Ms Nirmala Sitharaman and the Central Bank Governor announced a slew of measures to give individuals and businesses some relief amidst the uncertainty in the economy. The measures include, among others, more disposable income in the hands of the people. Despite the aggressive easing of monetary and fiscal policies, the lockdown caused by the outbreak and the mounting bad debt in the banking sector is likely to prevent the economy from fulfilling its growth potential. Even when operations revive post lockdown, it will take considerable time for the economy to reach a new normal with a shrunk size.
The silver-lining amidst this gloom is that nearly all developed countries have cumulatively announced trillions of dollars as stimulus to combat the economic impact of COVID19. Some of this money will probably filter back into the global business chain. When “globalisation is back to business”; countries like India would stand a winning chance to take-on mandates and with that, a chance to provide jobs to multitudes of young people in need of employment.
The summer of 2020 will nearly re-define the fate of the human race for many years to come and India is no different, awaiting its own destiny being re-written by a virus.
M&A in India
Between January 2020 to March 2020, around 127 M&A deals were announced of which 65 M&A deals were completed. The aggregate value of deals announced is USD 11,447.72mn; dominated by domestic deals (88) followed by cross border deals (39).
In terms of sectors (considering only closed deals), Information Technology sector saw the maximum deal value, with deals worth USD 290.23mn followed by the Utilities sector with deals worth USD 157.75mn and the Health Care sector with deals worth USD 153.38mn.
Significant Deals completed between January 2020 to March 2020
Target Company: Outbox Systems Inc.
Acquiring Company: Infosys Limited
Deal Value (in mn USD): 250
Sector: Information Technology
- Infosys Limited, through its wholly owned subsidiary, Infosys Nova Holdings LLC, acquired Outbox Systems Inc. for USD 250mn (INR 17.84bn).
- This acquisition elevates Infosys Limited’s position as an end-to-end salesforce enterprise cloud solutions and services provider, offering clients unparalleled capabilities for cloud first digital transformation.
- Post transaction, Outbox Systems Inc. would operate as a step down wholly owned subsidiary of Infosys Limited.
Target Company: East-North Interconnection Company Limited
Acquiring Company: India Grid Trust
Deal Value (in mn USD): 142.75
- India Grid Trust acquired East-North Interconnection Company Limited from Sterlite Power Transmission Limited for USD 142.75mn (INR 10.20bn).
- This acquisition is in line with India Grid Trust’s strategy to acquire accretive assets with long term certainty of cash flows.
- With this acquisition, India Grid Trust’s asset portfolio would increase to 9 power transmission projects with a total network of 20 power transmission lines that span more than 5,800 circuit kilometres across 13 Indian states.
Target Company: Intas Pharmaceuticals Limited
Acquiring Company: Temasek Holdings Advisors India Private Limited
Deal Value (in mn USD): 140
Sector: Health Care
- Capital International Global Emerging Markets Private Equity Fund LP sold its stake in Intas Pharmaceuticals Limited for USD 140mn (INR 9.96bn) to Temasek Holdings Advisors India Private Limited
- Intas Pharmaceuticals Limited is engaged in the manufacturing of pharmaceutical products. Its products include tablets, capsules, parental and cytotoxic formulations for the central nervous system, cardiovascular, diabetology, gastroenterology, urology, and oncology.
- As a part of the transaction, Capital International sold its stake to an unnamed existing shareholder of the company.
Significant deals announced between January 2020 to March 2020 but are not completed
Target Company: GMR Airports Limited
Acquiring Company: Groupe ADP
Deal Value (in mn USD): 1,507
- Groupe ADP has entered into an agreement to acquire a 49% stake in GMR Airports Limited for USD 1,507mn (INR 107.80bn).
- The said deal will help deleverage GMR Group further and result in improved cash flows and profitability and help pare its debt.
- The deal will unveil a first of its kind airport development and operations platform globally and the partnership with Groupe ADP is in line with GMR Group’s business direction to become a global airport developer and operator.
Target Company: Yes Bank Limited
Acquiring Company: State Bank of India, Axis Bank Limited, Bandhan Bank, Housing Development Finance Corporation Limited, ICICI Bank Limited, IDFC First Bank Limited, Kotak Mahindra Bank Limited and The Federal Bank Limited
Deal Value (in mn USD): 1,350
- Yes Bank Limited is raising USD 1,350mn (INR 100bn) from State Bank of India, Housing Development Finance Corporation Limited, ICICI Bank Limited, Axis Bank Limited, Kotak Mahindra Bank Limited, The Federal Bank Limited, Bandhan Bank Limited and IDFC First Bank Limited through preferential allotment under the YES Bank Limited Reconstruction Scheme 2020.
- As a part of the transaction, Yes Bank will issue 10,000mn equity shares at a price of INR 10 each to the investors.
- As per Scheme of Reconstruction, 75% of the total investment shall be subject to lock-in for 3 years, while the remaining 25% of the shareholding allotted to each investor shall be freely transferable and shall not be subject to any lock-in.
Target Company: Emami Cement Limited
Acquiring Company: SNuvoco Vistas Corporation Limited
Deal Value (in mn USD): 772
- Nuvoco Vistas Corporation Limited entered into a binding agreement to acquire Emami Cement Limited from Emami Limited for USD 772.07mn (INR 55bn).
- The transaction is subject to the customary approvals including from the Competition Commission of India and is expected to be completed in the next 3-4 months.
- Post transaction, Emami Cement Limited will operate as a wholly owned subsidiary of Nuvoco Vistas Corporation Limited.
The economic antidotes to the virus
Since prehistoric times, man has been more cautious about visible threats and enemies and has channelled significant energy and strategy in his defence against them. Notably, the human race has always been dormant when it comes to handling the attacks of infectious diseases and pandemics, leaving them more vulnerable in every outbreak.
Infectious diseases are a leading cause of death worldwide, accounting for a quarter to a third of all mortality. Since the beginning of the 20th century, there have been four major influenza pandemics, in the years 1918, 1957, 1968 and 2009 and all of them have left lasting impacts both on social and economic aspects of affected states and countries. Since these pandemics happened in either isolation or were contained rapidly, not much was learnt by the world unaffected by them.
The 2019 Novel Corona virus has been prophesied to be one of the worst pandemics the human race has ever witnessed; not only in terms of loss of human lives but also the impact on supply chains and economies globally.
The direct cost of the COVID-19 might not directly be significant on the GDP of a country, but the policies introduced for containment and arresting the spread, such as lockdowns, closure of geographical boundaries and closure of business and services, will result into unprecedented loss for economies. Most economies were already grappling with a slowdown and with the driver of the world, the ‘Manufacturing’ sector, being in shutdown, recession is inevitable.
With multiple governments imposing lockdowns one after the other, industries that involve face-to-face interactions and physical contact are the most hit. People employed in informal sectors which are generally low-paid employments, will bear the wrath of these lockdowns. Cancellation/deferment of existing business contracts, increasing levels of inventories and rising probability of defaults will be a common phenomenon. Plummeting investor confidence and ceased manufacturing will put additional pressure on both capital as well as operational expenditures.
The immediate and promising next steps by governments across the world will be lowering of interest rates, credit assistance, guarantees or tax and interest deferrals for distressed businesses. At an individual level they may also look at short time work allowance or doling out subsidies. These kinds of stimulus may boost the spirit of the sagging markets and stocks but might also trigger a run on cash.
Given that the global economy is suffering from an unprecedented supply shock due to shutdowns and people not being at work, demand stimulus will boost inflation, potentially leading to stagflation (weak or falling GDP growth alongside rising prices).
Going forward, businesses must evaluate and consider risks emerging out of pandemics, recession and geo-political scenarios which are beyond usual business dynamics. They should look at adopting technologies (like Artificial Intelligence, Big Data, etc.) to detect early signs of such pandemics and finding an optimum solution to brace for impact. They should also exercise fiscal prudence and cost discipline. The austerity drive across functions will reduce the pressure on the bottom line and help organisations speed up the business cycle. Given the adversity in the situation, organisations should consider minimising layoffs and retaining employees, this will not only facilitate confidence amongst employees but will also help in building the economy by creating demand.
Is your business ready with a resilient and sustainable operating model?
Economic challenges due to natural disasters or pandemics are impossible to predict, however the probability of their occurrence is certain. While Les Prophéties would fail to predict these Black Swan events, they are certainly going to happen.
Charles Darwin once said, “It is not the strongest or the most intelligent who will survive but those who can best manage change.”
The world is changing, with massive implications for business strategy and on value creation. Whether it is pandemics, climatic disasters, new energy systems, disruptive technologies, new business models or rising geopolitical uncertainty, the operating context for businesses is evolving. So, the question that arises is, how do we develop resilient and sustainable businesses? However, to answer this vital question, there is no one empirically proven answer.
One of the best responses to this situation is not to try and integrate sustainability into the company’s business strategy, but to develop a completely new business strategy that takes sustainability into account and thus creates value. The current practice of developing a stand- alone sustainability strategy and somehow dovetailing it with the business strategy will not work in times of uncertainty. Creation of resilient business strategies that take into account sustainability as their foundation, is to be explored.
Resilient business strategies are based on an understanding that the rapidly-shifting external context— pandemics, climatic disasters, new energy systems, disruptive technologies, new business models or rising geopolitical uncertainty and natural resource scarcity are not “only” sustainability issues, but also business issues. In many ways, sustainability issues and business issues have converged. Sustainability makes us more innovative, more flexible, and more resilient. A resilient business strategy will be different from industry to industry and from company to company, but there are several elements that will be common to all businesses. Some of these are:
Products/services as sustainability solutions: Generating revenue growth by developing products, services and solutions that meet sustainability needs, achieving the UN Sustainable Development Goals, or reaching remote or under-served stakeholders is key to this model of resilience. This requires that we view the sustainability challenge not as a risk to be mitigated, but as a driver of innovation for new products, services and technologies.
Strategic foresight: Such foresight provides structured ways to identify signals of change on the horizon, explore multiple possible futures and create fit-for-purpose strategies that account for turbulent externalities.
Capital assets and allocation: To accommodate unforeseen changes in externalities, businesses may like to reconsider allocation of capital (relevant of the six types as per International Integrated Reporting Council) after taking into account the opportunities and risks of sustainability. The six capitals are financial, technological, intellectual, social, human and natural capital.
Business continuity and resilience: Ensuring that Enterprise Risk Management (ERM) processes fully consider sustainability challenges and opportunities. The current practice of identification of risks-that-matter ignores risks of sustainability in most companies across the world. Thus, sustainability risks and opportunities remain outside the purview of ERM.
The key to achieving all the above seamlessly is to have the right team. The millennial workforce has different expectations of workplaces. Their expectations from their employers move beyond the basics of monetary compensation and job profile. They anticipate to work for a company whose values are aligned with theirs and for this workforce sustainability plays a vital role here, as their value systems are built around it. A new approach to building business models with sustainability at the core is thus not only essential to ensure resilience and business continuity but also to attract and retain good talent.