There is a lot more risk aversion happening: Rothschild & Co India head

In a Q&A, the firm's India MD Chandresh Ruparel discusses the current M&A and PE space and outlook, even as he remains most bullish on India among BRICS nations for its ability to attract capital

Rothschild & Co is one of the most active global investment banks in the country, conducting an average of 12-13 transactions a year. It has been at the forefront of some of the largest cross-border merger and acquisition, restructuring and capital advisory deals here. Chandresh Ruparel, managing director and India head, discusses the current M&A and PE space and outlook for the segments going ahead, in an interview with Raghavendra Kamath.

What kind of money is available for emerging markets like India, whether for VC, equity infra or real estate?

Which country is now standing tall among the BRICS? It is India. Brazil has its own set of problems, Russia is in conflict, China is inward looking now and South Africa has slowed down. As the country and businesses grow and mature, a clear pathway for private equity to invest in growth and buyouts enhances, which is what we are seeing. In the past few years, there was enough liquidity within private equity from venture capital, growth equity, buyouts, infra funds, and also the emergence of structured credit. A couple of trillion dollars of dry powder existed, There is still, globally, enough capital waiting to be invested and India will likely be a slightly higher beneficiary of that capital. However, there is a difference – a lot of venture money was actually adventure money. Valuations went all over the place, there have been some accidents also that occurred in that space. The focus now for that part of capital is on the inherent strengths and profitability of a business model as opposed to buying top lines. So probably that part of the capital is something which is less available than what was available in the past.

If you look at global, well-established buyout funds, private equity funds, the larger funds that have been able to go out and seek the next round, are getting probably more than what they require whereas the smaller and some local funds might find it slightly difficult getting commitments. So big might get bigger, and small might probably struggle getting new funds. There is also a decent amount of--call it the churn--in PE portfolios with exits to the next PE, alongside new investments.  Private equity is an integral part and has a fair 30-40 per cent share of the Indian M&A deal volume now.

But on other overall bases, volumes are down, not because opportunities are not available, but buyers are a little more selective than anything else. And that again is sectoral. So technology is probably today where the bid-ask is a little wider given the global environment on services, but AI et al are attractive. Then there are spaces where activity levels remain strong, such as infrastructure and industrials, pharma, healthcare and consumer continue to be interesting spaces. The financial services service space has opened up, they are the pockets where there continues to be enough activity. Caution also comes in as financing is less available now and the cost is three to four per cent higher at the very least.

What trends are you seeing in the Indian M&A and private equity space?

Volumes are down and will probably remain down this year – we are 70-80 per cent down for calendar year, notwithstanding a few large transactions announced for the same period last year. I see the sectors that I mentioned earlier remaining active. I'd like to believe every significant PE house has at least one or two files that are being seriously evaluated, some even bilaterals. M&A is down, inbounds have been down for a few years. However, we feel consumer might be a space to watch out for as would pharma and chemicals. Outbounds would be selective, with some rebalancing of global portfolios. For example, we advised on Varroc’s international auto parts disposal last year; and Inbrews acquisition franchisee of 32 spirits brands and manufacturing sites in India from USL / Diageo.

Why did the volumes come down?

It's more caution than anything else. It is also a factor of the bid-ask spread. There was a lot of ebullience in the past two years. The cost of capital was low and today suddenly it is high. Interest rates are up 300-400bps in less than three to four quarters and there's a lot more risk aversion happening including from the lender side. Plus, there is a pause to evaluate and call for rates to stabilise and a rebound from the slowdown/recession in USA and Europe….this has implications for the strength of the banking sector and availability of credit.

So, unlike the FOMO of last year, the sentiment is probably a little more guarded now, but there is a recognition of the fact that in India, there is growth and if things are available at sensible valuations, there are transactions to be done. Deals are clearly taking longer to close because there is a lot more diligence happening. There is a lot more conviction for the proof of concept that one wants to go through. There is a lot more sustainability of revenues and profits that one wants to focus on than anything else.

Given the macroeconomic conditions in India and whatever is going on in the US and in European markets, what kind of deals are you choosing now in India to execute?

The deals are sector-driven and focused on what the private equities have in their portfolio. There are gems in the portfolios; there are those that have to be resolved given the time period of hold. Some are chunky enough, are global players in their standing and their benchmarking

So private equity churn and sectoral themes are playing out in the space is what we are working on. In the sector championships that we have, there are areas like energy, renewables, pharma, healthcare, technology, consumer, financial services including lenders and para banking where we are having conversations. We've developed quite well this year.

There is a lot of talk that companies and businesses are being overvalued. How do you look at it?

The Indian market is trading today at 20-22 times forward PE, which if you look at it on a 15-year average basis, might seem to be a little overvalued today. However, one has to look at multiples being driven by expected growth as well as return expectations of an acquirer/investor. There is always this view that Indian markets are more valuable in specific sectors. For example, consumers, the markets value some at mid-20s EBITDA. Now is that overvalued? Not necessarily in my view. Look at these companies from a sustainable growth and EBITDA at the scale-up lens and especially if companies are growing YoY at 15 per cent plus a steady state growth which will come in only after 10-15, the ask is not unreal.

Do you think exits by PE firms are taking a slightly longer time now compared to the pre-Covid years?

The deal activity that happened during the pre-Covid years was something that was probably not even thought of. India probably overperformed for all practical purposes. I don't want to compare that period because it was a lot more ebullient and a lot of easy money was available. There was a FOMO effect maybe which led to speed-dating and closing.

I would say a typical exit from a fund perspective is five years or thereabouts. The Covid deals that were struck in bubbly times, may have to either bite the bullet or hold for long for an exit. For quality assets, otherwise, a launch to close is maybe slightly longer…not too much. Some reasons we discussed already.

It can be quicker as well depending on the space and the quality of the trade. The avenues of exit and the confidence of exit are a lot more than what it was in the past. Good deals are easily discernible

Nowadays, we are seeing a lot of global investors looking for private credit deals in India. Do you think that this private credit will overtake equity raising in the coming quarters?

The ECM activity has tapered off a bit. That opens up an avenue for bridge financing/refinancing where such funds step in. The private credit market also finds an opportunity where, on a cost of credit and time-adjusted basis, the valuations that a public market may offer may not be encouraging enough both in terms of demand for the stock or for the size/scale of offering that one is looking for. These private credit opportunities are expensive, however promoter financings/refinancing of debt etc factor all such aspects.

In the absence of the ECM market, obviously, credit funds should thrive. However, should the market windows remaking shut for a sustained period, some radical measures for addressing the servicing of structured credits may require to be taken. My personal view is that one should start seeing some decent high-quality and select ECM trades being triggered in smaller windows. Markets may remain volatile vis-à-vis ECM activity.

Many PE firms are looking at buyouts as their  main strategy. Will this strategy continue in the coming days?

They will, and PEs are happy to take up promoter roles. The Indian equity market lacks depth as far as ECM and post-listing are concerned. Hence, to get a full exit in a time-defined horizon may be exhausting. Add to that the need to optimise for time and IRR, a billion buyouts can be nurtured and harvested, but a 100 per cent exit is going to take longer. So as soon as a buyout fund invests, it has to start planning for an exit alongside the value adds it does to the portfolio company. And think really hard if listing will be the best avenue for realising value/IRR maximisation……one hopes that markets will mature.

How do global investors look at India as an investment destination? Do you think India will be able to take a lead in terms of investment hub as part of China plus one strategy?

They look at India more positively than five years earlier but a lot more can be done to make India an even better destination. Several significant steps have been taken in terms of taxation, encouraging local manufacturing, GST simplification etc. For example, around 5,000 Japanese companies have been incorporated and have operations in India. However, India has the potential to do a lot more to take advantage of the time today where we stand to gain, geopolitically and in terms of market attractiveness. Definitely, China plus one but a shift towards full manufacturing is being sought following which probably a lot more work is required to foster homegrown innovation and not jugaad. There are people who are looking at India. I was with a global CEO of one of the large European pharma companies recently and they were keen to invest in India and have their entire back end including parts of even R&D housed here. That is a great step ahead for us.