Financial markets are never devoid of opportunities even in the worst of times. Covid-19 may have brought economies and industries to their knees, but the dealmakers are super-busy these days, stitching together one after another capital raising, and also finalising the odd merger and acquisitions (M&As).
These activities offer solid insights and sectoral outlook for serious equity investors to spot the next best wealth creation opportunities.
Equity capital market (ECM) activity in India has already hit a record in Calendar 2020, with three more months yet to go. Ravi Kapoor, Head of Corporate and Investment Banking at Citi India – one of the busiest dealmakers in India’s M&A space – doesn’t hide his excitement when he reels out these numbers.
- As of mid-September, Indian enterprises have raised an aggregate $33 billion, the highest-ever capital raised in a year.
- Since the market correction on February 19, 2020, due to the Covid-19 outbreak, India has witnessed capital raising activity aggregating $28 billion.
- Citi has been on the forefront of the capital raising activity, having executed over 10 transactions since July, raising over $8 billion for clients across formats, including QIP, InvIT, REIT, FPO, rights Issues.
- For Calendar 2020 year to date, Citi has led over 18 ECM transactions raising $22.6 billion.
It’s not for nothing that times of economic slowdowns and business crises are talked of as the best times for iBankers and dealmakers.
Even on the M&A front, there has been brisk activity. “It’s on the rise for us as well as our peers,” says Kapoor. As sovereign wealth funds (SWFs) and pension funds hunt opportunities, the India Growth story is standing out in the global landscape, he points out.
“India is still being seen as a strong long-term growth story despite the recent slowdown. Abundant liquidity, relatively low valuation entry points and a strong appetite from sponsors, particularly SWFs and pension funds, are fuelling this surge. Both cross-border and domestic consolidation are expected to be key themes in the near-to-medium term,” he says.
Nexdigm in a report this Monday said India’s deal market has clocked $42 billion in the first half of 2020. “The majority of this deal value – 58 per cent – stemmed from the M&A landscape, driven for a large part by the sudden need for collaboration. Most of the M&A deals happened in the technology and healthcare spaces – both of which have been the backbone of the economy during this crisis,” it said.
Kapoor says the Covid-19 crisis created a perfect test tube to build the strongest capital raising environment globally, and in India, over multiple decades.
“Companies moved rapidly to raise defensive capital with differing objectives – deleveraging capital, insurance capital, confidence capital, opportunistic capital – to deal with near-term uncertainty – and, at the same time, focused on creating long-lasting benefits and a competitive advantage for the business in a bid to assuage concerns of various stakeholders like ratings agencies, customers and employees,” he says.
The seasoned dealmaker says investors have been highly supportive of capital raising by high quality companies, which are likely to create significant opportunities from this crises. “Healthy liquidity and attractive valuations relative to the long-term outlook have come in handy. Investors have acted as true partners for corporates, lending a helping hand to them and sharing the economic pain,” he says.
Financial institution groups (FIGs) have been the most prolific issuers of capital in India, accounting for approximately 40 per cent of the total equity capital raised so far.
“Lending institutions, given their leveraged capital structure and diverse asset base across segments of economy are highly sensitive to any economic stress and are typically the first ones to take action. This is also a sector where capital and ability to raise capital creates a real and tangible competitive advantage. Best-in-class lending institutions have used opportunistic capital raising to cement and augment their industry positioning,” Kapoor says.
Digital and technology-oriented sectors will continue to attract strategic interest, including growth capital. “We also expect continued activity in pharma and consumer-related defensive sectors. After a spate of capital raising in the broader FIG sector, the time is now ripe for further consolidation, particularly as clarity emerges post moratorium-related impact on NBFCs and banks,” he says.
While cheaper valuations have been a big draw for investors, at the same time Kapoor sees a clear trend that companies with stronger balance sheets or access to liquidity or lower cost of capital have been the main beneficiaries, being able to acquire assets relatively cheaply and enjoying multiple arbitrages too.
Meanwhile, there have been consolidations in many sectors. “The telecom sector has already seen consolidation, as have cement, retail and a few others. The next big wave of consolidation could come across in FIG, pharma or mid-cap IT space, which still have a way too many players than the market dynamics can support,” says Kapoor.
“Banking is clearly a sector ripe for M&A, particularly if the government were to privatise small banks in the times to come,” he says.
Credit: Stocks-Markets-Economic Times