In an interaction with Mint, Utpal Oza, head of investment banking, at Nomura India talks about how India is seeing a growing interest from strategic investors from Japan Korea and Thailand as companies look to diversify their supply chains from China, why capital markets have been abuzz with dealmaking despite the pandemic and how the Indian pharma sector has become a big target for private equity funds.
Given the talks of China plus one strategy, are we seeing inbound M&A interest from global companies? Which sectors are seeing an interest?
Since March, with the shift in sentiment to reduce dependence on a single country, we are seeing increasing interest from international companies wanting to invest in India. Interest is largely from Asia led by Japan, Korea and Thailand although we are also seeing interest from Europe. Some of these enquires are in sectors such as agrochemicals, building products, logistics, packaging, and new-age technology including electronics, sectors where we have not seen significant interest in the past.
This trend has also been encouraged by countries such as Japan providing incentives for local companies to move production facilities as well as India’s own production-linked incentive scheme. There is growing interest in the consumer and retail sector as well.
Despite the pandemic, capital markets have seen very high activity in the last three-four months. How is the capital market pipeline looking like going into 2021?
We are bullish on equity capital markets. With the expectation of fast economic recovery, fundraising this year is at a decades high, with close to 60 transactions raising almost $35 billion, a level not seen in the recent past. This year’s activity was led by the large cap companies which dominated with qualified institutional placements (QIPs) and mega block deals. And then the mid-market IPOs came into play. I believe the IPO momentum will continue into the new year as there is a strong tail wind.
Investor preference is for high growth, better managed and governed companies, with differentiated or ‘new’ stories. With global liquidity, there is capital chasing the few companies tapping capital markets and hence the demand numbers that you’re seeing for all the recent IPOs look fantastic.
The number of demat accounts have also jumped significantly and that explains the growing retail participation, which is usually over 10 lakh applications across some of these IPOs. There is a decent pipeline building up. We are very constructive on the domestic IPO market. Hopefully, we will end the calendar year as the No. 1 bank in terms of the value of IPOs in India. It’s clearly a space we want to dominate.
The press has been abuzz with statements of Indian tech companies announcing IPO plans, especially overseas listing. Will 2021 see some activity on that front?
In terms of business performance and business models, there is increasing maturity and cash flow backed growth among some of these new-age Indian companies, some of which are large in size and can potentially go and list overseas. Right now, what we are seeing are ambitions and aspirations being announced. There is a fair amount of paperwork to be sorted, and given the regulations, we could look at companies listing internationally towards the end of 2021 or early 2022.
However, you will also see a number of Indian companies favoring the domestic market on the back of successful listings such as those of Happiest Minds and Affle. So in 2021, we expect a fair amount of listings to happen in India as well. Clearly, investor interest is high and they are being fairly valued, so every company would have to decide between India or overseas as a listing venue.
Private equity funds appear to be most busy investing in the pharma sector this year, especially large buyouts, which were rare previously. What’s driving this investment frenzy?
Pharmaceuticals is definitely the most sought after sector currently. There are a few things that are playing out right now. Intrinsically, it is a defensive sector. So the vagaries in terms of business cycles don’t affect pharma. There is visibility as well as sustainability of earnings that acquirers can estimate clearly. It’s always been a sector where companies are under-leveraged, so the ability to use financial leverage to boost returns makes it attractive and you have lenders such as us who are very active in this space. Two, because of geopolitical tensions worldwide, there is a move to diversify the supply chain and people are testing what can happen in India.
The Active Pharmaceutical Ingredient (API) industry is a direct beneficiary of this move. A similar theme is also being played out across the bio-similar and contract research, development and manufacturing (CDMO) space. And then the larger buyouts – you have Indian founders who are either looking to deleverage by taking in private equity, or large families who believe it’s time to pass the baton. Pharma, and the broader healthcare space, is an area where there is a fair amount of activity and that will continue for the next 12-24 months.