India's deal-making activity unfazed by elections: BNP Paribas' Murugaiyan

Underpinned by the country’s favourable macro, the outlook for India’s equity capital market (ECM), debt capital market (DCM) and mergers and acquisitions (M&A) remains positive, says GANESHAN MURUGAIYAN, head of corporate coverage and advisory, BNP Paribas India. In an email interview with Samie Modak, Murugaiyan, who oversaw close to a dozen ECM deals in 2023, says large sell-downs by private equity (PE) firms show the depth of the domestic market. Edited excerpts:

The past 12 months have proved quite a fertile ground for share sales. What according to you has underpinned this deal-making activity?

At present, India is in a sweet spot when compared to other emerging markets. Political stability, policy continuity, robust macroeconomic fundamentals and a stable currency have been conducive for earnings growth. Additionally, the market benefits from a consistent inflow of funds — both from foreign portfolio investors (FPIs) and mutual funds (MFs). However, despite these positive factors, FPIs currently have “under-ownership” in the Indian market due to selloffs seen in earlier years. As it corrects, it will provide a cushion against any decline in domestic inflows. Moreover, expectations of declining interest rates globally will further boost flows into equities.

What is the outlook for DCM and ECM for the next 12 months?

There is a cautious optimism amid lingering geopolitical uncertainties. We have an optimistic outlook on ECM, especially after elections, with positive momentum propelling forward. Notably, several large listings are on the horizon, promising an active landscape. After a period of unattractive rates relative to domestic funding costs, there is a resurgence in appetite for debt issuances, signalling a potential rebound in DCM activity.

We foresee this momentum persisting after the elections, indicating a continuity of policies and strategic direction for the country. This continuity bodes well for sustaining investor confidence and bolstering market sentiment. As we navigate these dynamics, the convergence of fundamental factors and investor outlook will continue shaping valuation trends.

How has the year been for M&A and debt fundraising? What are the key trends here?

The M&A activity was sluggish, with 2023 seeing a decline of 25-30 per cent compared to earlier years. However, as we delve into 2024, there is a noticeable resurgence in momentum. Notably, the landscape is witnessing a surge in domestic M&A transactions. PE is emerging as a substantial player, with many assets poised to change hands this year. Estimates suggest that M&A activities in India are poised to reach around $75 billion, a notable increase from the $60 billion recorded last year. In the wake of the Ukraine war and the supply-chain disruptions that followed, regions have experienced significant shifts in their cost structures. Particularly, input costs, predominantly for fuel, have surged. Concurrently, the relocation of operations has driven up employment expenses, rendering certain industries uncompetitive in specific geographies. This dynamic presents acquisition opportunities as companies seek to recalibrate their presence to maintain competitiveness. These factors will continue to influence market sentiment and M&A, particularly in routes connecting India to Europe.

Are there any key headwinds that one should be mindful of? Will activity remain slow until the election results?

One cannot overlook the ongoing geopolitical situation. If oil prices increase due to the crisis, it could impact India’s inflation trajectory. As far as global political outlook is concerned, 50 per cent of the world population in over 60 countries will be headed for elections this year. The outcome in some geographies could impact the financial flows and supply-chain dynamics. Historically, there have been instances of slowed activity in some years before the election. But we have also seen instances where deal making has remained active. In India, we don't expect any slowdown in activity due to elections, apart from technical factors like updating prospectus for annual results cycle, which will naturally lead to a lean period.

How has the FPI participation been?

If you look at the long-term trend of over 10-15 years, among emerging markets, India has been the only country which has consistently received net positive FPI inflows across most years, barring a few when there have been negative net flows. Robust macroeconomic fundamentals, political stability, and the anticipation of an end of the monetary-tightening era make the India story even more compelling. FPIs have also been consolidating their holdings after selling off in the previous years. We believe India will continue to be a frontrunner among emerging markets.

How are the trends on the PE side? Will robust secondary-market activity boost the PE ecosystem?

In India, PE has seen an average annual investment volume of about $40 billion in the past five years. We have seen the investment volume declining from its peak in 2021, but this is in line with the global post-pandemic normalisation in deal-making activity. PE investments in India have been extremely active, both on the buying and selling sides, reflecting the continued interest and confidence of investors in India’s resilient economy and growth potential. We have also seen some large sell-downs by PE firms. This has helped the funds invested in India to return capital to their limited partners. This, in turn, boosts their sentiment to invest further into India-targeted funds. Kedaara’s fundraising of $1.7 billion in record time — this is the largest India-focused PE fundraise ever — represents the depth of appetite for India’s PE story.