Banks could consolidate with NBFCs as valuations looking sensible: Girotra

'I feel more positive about the NBFC sector than I did in the last three years', said Manisha Girotra

For the next five years, India looks like a positive destination unless we do something which is unexpected, believes Manisha Girotra, CEO, Moelis India. In an interview with Manojit Saha, she says that large companies could acquire start-ups that cannot sustain themselves on a standalone basis. Edited excerpts
 

How much of a challenge do the global headwinds pose to Indian M&A activities at a time when developed markets are raising rates and there are recession fears?
 

The global economy and the markets are facing unprecedented chaos and disruptions. A lot of it is caused by the last two-three years when excessive liquidity was pumped into the large global markets, which then made its way into the companies and stock markets, creating frothy valuations. This has also led to a lot of people, who were out of the workforce, used to getting subsidies. This, coupled with the Russia-Ukraine war, food and energy crisis, and supply chain disruptions, have led to a perfect storm. These naturally led to investors panicking and money flowing back to the home market, primarily the US, which saw the dollar strengthening. However, in the last couple of months, the market has started pricing in the risks. The market is now discounting some of these risks and capital is back to finding its way into India. Today India is the only large country showing 6-7% GDP growth as compared to the global economies. After the initial chaos, we are coming out as a strong, stable, robust country with strong regulatory framework, a stable government, strong consumer demand and favourable demographics. In the next five years, India will look very positive as a destination unless we do something which is unexpected to the markets.

Since May, the Indian IPO market has taken a turn for the worse. What has led to this downturn, how will the market to revive?
 

In the last 50-60 years, Indian companies tend to go to the IPO market earlier than most global economies because we do not have a strong debt market. Only debt we can get is from the banking sector. Last 12-18 months was a different phenomenon. Liquidity was in excess, and investors were looking for newer destinations and newer stories. Whether it was the private market or the public one, a lot of the companies, which were not ready for the IPO market, came into it even if their valuations were completely unjustified. This was nothing unique to India and was happening globally. With the capital getting pulled back, some of the companies which were not ready for IPOs and some more which were planning to come by burning investors’ money, showing growth for the sake of it, went ahead. Those models are over for the good as, otherwise, investors would have lost money. The IPO market will only be available to mature companies, and to ones which have robust business models as they can sustain difficult and challenging market situations.

PharmEasy has called off its IPO. Do you think start-ups will find it difficult to tap the capital markets after a poor show by Paytm and Zomato?
 

I am positive on the start-up and the tech sector in India. What had happened was that valuations were ahead of themselves, and some of the business models were not robust enough. What you will see now is that instead of investors finding exit from the public market, some companies will consolidate in the private market, leading to forced consolidation and merger, which is already happening. You will see some of the large corporates buy start-ups which cannot sustain themselves on a standalone basis.

NBFCs have faced difficult times in the past. Now we have the HDFC-HDFC Bank merger, and one of the reasons cited for it is that NBFC regulations are almost aligned to that of banks. Do you get a sense that more NBFCs are looking to merge themselves with banks?
 

I am positive about the NBFC sector. ­A lot of the problems faced by them are behind us. During the pandemic, NBFCs with good parentage, have invested a lot in technologies. So they are able to compete with the banks now. Having said that, I think this sector will see consolidation. And I see banks consolidating with NBFCs as valuations are looking more sensible.