Foreign direct investment (FDI) is a hot-button subject in India today. Everybody — from Prime Minister Manmohan Singh to the average man or woman on the street — has a view on how to make the country more attractive for fund flows. Bolstering FDI is especially critical now because the current account deficit (CAD) is at a threatening level and could push the country into the sort of crisis it faced 25 years ago when India had to hawk its gold and seek assistance from the International Monetary Fund. During 2012-2013, CAD stood at $87.8 billion (4.8% of GDP) as compared with $78.2 billion (4.2% of GDP) during 2011-2012.
But the FDI that is being looked at most closely by executives is not the money coming but the money going out. After two years of trying to reignite India’s economy — GDP growth has fallen from 8%-9% in recent years to barely 5% now — cross-border takeovers are back on the radar.
The numbers indicate that a nadir of sorts has been reached. “The total value of outbound deals in the first quarter of 2013 was $0.19 billion (21 deals) compared to $0.69 billion (26 deals) during the first quarter of 2012,” says Bundeep Singh Rangar, chairman of IndusView, a consultancy for multinationals seeking to enter the Indian market. “I believe that M&A deal activity should pick up.”
Anecdotal evidence bears out his conviction. The Aditya Birla Group has a reserve of $1 billion to set up a chemical or fertilizer plant in the U.S. A team has been dispatched to America to evaluate the firm’s options. “We have been looking at an investment in the U.S. as there is enough cheap gas,” Aditya Birla Nuvo managing director Rakesh Jain told Indian economic daily Business Standard. “So, like a lot of Indian chemical companies, we are looking at the country for investment in the next few months.” Aditya Birla Nuvo is part of the Aditya Birla Group, a $42 billion Indian multinational operating in 36 countries in six continents. More than 50% of the group’s revenues come from overseas operations. Another group company, Novelis, the Atlanta-headquartered aluminum major acquired by Birla for $6 billion in 2007, is also spending $1 billion on expansion.
At the Reliance group, which has annual revenues more than $66 billion, U.S. shale gas is the target segment. The company had set up three joint ventures with Chevron, Pioneer and Carrizo in 2010. “Today, we are among the largest foreign investors in this business, with investments exceeding $5.7 billion on March 31,” chairman Mukesh Ambani said during the company’s recent annual general meeting. ”All three [joint ventures] are now operational and we are selling into competitive markets in Pennsylvania and Texas.” The plan is to invest another $5.1 billion in the next three years. This will take total investment above the $10 billion mark.
At the $100 billion Tata group, which is India’s largest and has overseas revenues of 58%, brand-building is getting top priority. The Tatas were recently ranked the most valuable Indian brand by Interbrand India in its first ever rating exercise for the country. But at an international level, the 145-year-old group has a long way to go. The U.K.-based Brand Finance puts them 39th in the pecking order.
According to United Nations Conference on Trade and Development (UNCTAD) data, Tata companies have a decent sprinkling in the Top 100 non-financial transnational corporations from developing and transition economies. The Indian companies on this list are Tata Steel at 22, Tata Motors at 23, Bharti Airtel at 31, Oil & Natural Gas Corporation at 44, Hindalco (Aditya Birla group) at 51, Tata Consultancy Services at 71, Suzlon at 84 and Reliance Industries at 99. The list is led by Hutchison Whampoa of China (Hong Kong). “The Tata group is preparing a blueprint to promote the Tata brand globally and has identified the U.S., Europe and Africa as areas of focus,” according to Business Standard.
The Tatas are already aware of the importance of branding abroad. In October 2010, the Tata trusts and companies gave Harvard Business School a gift of $50 million, the largest from an international donor in the school’s history, to set up a Tata Hall for executive education. The unstated objective was to become a familiar name to Harvard grads.
Yet another player, the New Delhi-based Bharti Airtel, a global telecommunications company with operations in 20 countries across Asia and Africa, came into the spotlight when it took over the African assets of the Kuwait-based Zain group for $10.7 billion in 2010. It has now spread further to Bangladesh and is hoping to get a toehold in Myanmar.
The difference today from the outbound mergers & acquisitions of the past two years is that India’s largest companies are again getting into the act. After Jaguar Land Rover (Tata Motors), Corus (Tata Steel), Novelis (Aditya Birla group) and Zain (Bharti), there was a pause in the billion dollar-plus acquisitions. But smaller players have been active in sectors such as fast moving consumer goods. A recent study by the Indian School of Business and Brazilian business school Fundação Dom Cabral found that the successful route for growth of Indian transnational corporations will be through overseas takeovers.
“FDI outflows from India reached their peak of $20 billion in 2007 and have since declined,” the UNCTAD reported. “Indian TNCs are active acquirers in developed countries such as the U.K. and the U.S. Indian IT service providers have long been important players in M&A markets. In recent years, firms from service industries such as banking and food services have become increasingly active in overseas markets.”
“We have come to the middle of yet another turbulent year,” notes Harish H.V., a partner with the India Leadership Team at Grant Thornton. “We seem to be in for an interesting second half…. As always, in a turbulent environment we see an active M&A scenario.”