Investors guide to benefitting from increased M&A activity in India Inc

Industry:    2022-04-27

The deal market is buzzing with a spate of mergers and acquisitions being announced by India Inc. Starting from PVR-Inox to HDFC-HDFC Bank, the Indian corporates have seen big names announcing mergers.

And the list doesn’t end here. Larsen & Toubro Infotech and Mindtree could be next in line, while JSW Group, Adani Group, Ultratech Cement, and Shree Cement have reportedly shown interest in acquiring Holcim’s Indian assets. Wipro Ltd has also announced acquisition of SAP firm Rizing Intermediate Holdings.

On the bourses, shares of these companies have remained volatile, reacting to every news flow. But the key questions remain as to why is there a flood of M&As right now, and how can investors benefit from them?

According to Dinesh Arora of PwC India, the trend underlines India Inc’s cash-rich companies’ desire to expand and eye inorganic growth.

Arora explains that companies went for cost cuting in 2020, and 2021 was the year when people started investing in growth.

“On supply side, a lot of companies haven’t been able to recover. These macro factors are driving the pace and volumes of transactions,” he says.

According to a report by Refinitiv, M&A activity hit a four-year high at $30.3 billion during January-March quarter of 2022, bucking the global trend where deal-making fell sharply.

Deal activity grew by 5.6 per cent year-on-year in value terms in Q1CY22, making it the highest first-quarter period since 2018 when it was $31.1 billion.

In volume terms, the M&A activity grew 29.6 per cent YoY, making it the best-ever quarterly number.

Yet, Utkarsh Sinha, managing director at Bexley Advisors says India has a long-way to go in terms of maturity of M&A activity.

Sinha says the recently announced mergers fall in the horizontal M&A category, which is driven by saturation in scale, aspiration to grow via absorption of competition, or driven by individual sponsors or investors.

So, if you wish to benefit from these M&A activities, here’s what you need to be mindful of. According to Abhay Agarwal, Founder and Fund Manager, Piper Serica, some M&As are forced. As such investors should carefully assess reasons behind M&As. While short-term traders will be disappointed, Agarwal reminds that most mergers are value accretive only in the long-term.

That apart, investors should assess each M&A deal based on synergies and valuation. Ram Kalyan Medury, Founder & CEO, Jama Wealth reminds the Satyam-Maytas fiasco taught us that shareholders are active in opposing deals, but that doesn’t mean all mergers are against share-holder interest. Every deal needs to be assessed individually and investors should avoid taking positions based on initial news announcements, he says.

In nutshell, deal-making activity including acquisitions, divestitures and alternative M&A strategies will be robust in 2022. Investors, however, need to be patient and look for long-term benefits before betting on them.

On Wednesday, stock-specific action amid March quarter earnings will drive the markets.

Bajaj Auto, HDFC AMC, HUL and Indian Hotels are some of the prominent companies slated to report their Q4 numbers today.

That apart, global cues and cabinet decisions will guide the markets.

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