Big overseas buys: Boost for footprint, mixed bag for bottom line

Profitability has been a mixed bag amid operational challenges

Indian companies that made bold acquisitions abroad have often seen their overseas revenue outstrip domestic growth, despite the robust pace of India’s economic growth.

According to an analysis of some of the largest overseas acquisitions by Indian firms, their foreign market revenue grew between 1.6 percentage points and 17.6 percentage points faster than domestic operations.

The decision of Bharti Global, the international investment arm of Bharti Enterprises, to purchase a 24.5 per cent stake in British telecommunications giant BT for around $4 billion, announced on Monday, has thrust such deals back into the spotlight.

The aforementioned analysis considered the top five overseas acquisitions since 2000, based on a list from data provider LSEG Deals Intelligence. Acquisitions involving multiple investor groups were excluded, while key deals in the automotive and pharmaceutical space were added to the list. Each company on the resultant list recorded faster growth in its overseas market than the domestic market after a larger foreign acquisition, even as profitability was often a challenge.

For instance, take Tata Steel’s $12.7 billion acquisition of Corus Group in 2007, the largest overseas deal by an Indian firm in the 21st century. While Tata Steel’s India revenue grew at a compound annual rate of 13.2 per cent between FY08 and FY24, its overseas top line rose by 14.8 per cent. Yet, profitability has been elusive — Tata Steel’s European operations have struggled since the acquisition with operating losses as of FY24, according to rating agency ICRA. The Indian steelmaker posted a loss of Rs 4,910 crore in FY24, after reporting an Rs 8,000 crore profit in FY23. Similarly, telecom major Bharti Airtel’s $10.7 billion acquisition of Zain Africa in FY11 —  the second largest by an Indian firm —saw overseas revenue grow at a 24.7 per cent CAGR, compared to 7.1 per cent growth in India. Yet, African currency devaluations, particularly of the Nigerian naira, dragged down the company’s overall performance in FY24, resulting in a 10.5 per cent year-on-year profit decline to Rs 7,467 crore.

Hindalco’s $5.8 billion acquisition of US-based Novelis in FY08 provides a contrasting picture on the profit front. Overseas revenue has grown at 19.2 per cent since the deal (until FY24) — almost double its domestic growth. Novelis recorded over $16 billion in sales, or 60 per cent of Hindalco’s total revenue in FY24, generating $600 million in net income. Hindalco itself recorded a profit after tax of over Rs 10,000 crore (around $1.2 billion) for the year.

The period after a number of these large acquisitions coincided with a decline in the value of the rupee. A weakening rupee can be a positive for assets held abroad and, according to experts, also plays into another reason for overseas acquisitions -- geographical diversification.

Geographical diversification, technology transfer, low valuations, and the possibility of upside from a turnaround are among the driving factors for many large deals, according to Deepak Jasani, head of retail research at HDFC Securities. Depreciation in the rupee would mean that overseas operational revenue growth would appear higher in rupee terms, he said.

“Indian companies have benefited from acquisitions, but often only after a time lag,” Jasani said, adding that many firms have expanded their foreign footprint through additional acquisitions after their initial foray abroad, further boosting their foreign inorganic revenue growth.

Mehul Savla, partner at boutique investment bank RippleWave Equity Advisors, who had been part of similar large deals in the past, said such acquisitions are often made with an eye on technology and access to new markets. Several of these buys have taken place during periods of distress for the target company, he said.  

The allure of overseas markets is also evident in other deals. Agrochemical giant UPL’s $4.2 billion acquisition of Arysta LifeScience in FY19 saw its overseas revenue surge at a CAGR of 17.6 per cent, compared to an 8.8 per cent rise domestically. But challenges remain -- UPL reported a Rs1,878 crore loss in FY24, and the balance sheet is weighed down by the debt incurred to finance the deal. “The acquisition of Arysta in FY19 was funded through substantial debt ($3 billion), which led to gross debt of Rs 29,000 crore as on March 31, 2019, and resulted in moderation in the debt protection metrics,” according to rating agency CRISIL in a June 2024 note.

Sun Pharmaceutical Industries, which acquired a controlling stake in Taro Pharmaceutical Industries for $450 million in FY11, has also experienced stronger growth overseas. As of FY24, its foreign revenues had grown by 21.8 per cent, compared to a 16 per cent increase in the domestic market, contributing to a consolidated profit of Rs 9,576 crore in last financial year. 

Tata Motors’ acquisition of Jaguar and Land Rover (JLR) for $2.3 billion in 2008 saw overseas top line rise at a CAGR of 13.8 per cent, compared to 11.2 per cent domestically. Tata Motors posted a Rs 31,807 crore profit in FY24. However, the British brand’s pivot toward electric vehicles will require sizable investments, according to an ICRA note in July 2024. This stands in stark contrast to Mahindra and Mahindra’s ill-fated $464 million purchase of SsangYong Motor, which it eventually sold at a loss.

For now, experts suggest that the outlook for these deals must be assessed on a case-by-case basis, as domestic opportunities may be fewer. “From a value perspective, India is not offering a lot of opportunities to buy,” said Savla.