19 Mar 13 Why long-term M&A and private equity prospects in India are bright
I am not going to repeat the “great” India story. Notwithstanding current problems, PE investors understand that India will grow substantially in the long run, and an under-served population of well over a billion makes this a market that cannot be ignored.
For a variety of reasons, ranging from small local markets, historical impediments to large businesses, barriers to internal trade (within India), undeveloped private equity and M&A markets, family ownership and inheritance culture; Indian industry is for the most part, highly fragmented. Very few industries are “mature” or concentrated in the hands of a few. More often than not, a large number of small players slug it out, with no clear market leaders. These “unorganized markets” are characterized by lack of scale, regional or local franchises, sub-optimal use of technology, lack of information (and therefore trust), and closely held ownership structures.
Yet, this is changing – and as market forces exert themselves, there is a gradual (but sure) consolidation and move to scale economies. In some industries (typically, more mature industries) like cement, we have already seen a wave of consolidation – and a handful of players now control around half of the market. In pharmaceuticals, there have been many acquisitions of Indian companies by foreign ones.
My hypothesis is that this trend will accelerate for several reasons:
- Cash-rich multinationals seeking growth will invest in India
- Given India’s unfriendly business climate and complexity, it is often far easier to buy than to build
- Many small, niche markets in India are now becoming large enough to excite investors
- SMEs are typically under-served by traditional financiers – the banks
- Many erstwhile small companies are now of decent size, and their local competitive advantages are not easily replicated
- Slowly, but surely, Indian promoters are now considering selling out as an option, versus handing over companies to their children
- Finally, we will move to a common national market once GST is implemented (even if it takes another 3-5 years), and this will drive scale benefits
We have already seen a fair number of acquisitions by international companies in a variety of sectors (Ranbaxy, Gujarat Ambuja, Hindustan Inks, Mphasis, etc.). More interesting is the large number of smaller deals like Camlin, Numeric, etc. This will only increase over time. For private equity firms, this could well be an opportunity – if they can identify such companies, accelerate consolidation and scale and then sell to international buyers. The opportunity exists across sectors, such as building and architectural products, food processing, transport and logistics; and especially in industries where local distribution acts as a significant entry barrier.
This isn’t going to be easy, particularly given that by definition, unorganized industries are characterized by poor information. Not much is known about these small and medium companies, and their promoters.