India Recalibrating M&A Valuation Amid Slowdown, Says JPMorgan's Kaustubh Kulkarni

The M&A activity has slowed in India, not because of a declining desire to buy or sell amid global recession fears but recalibration of valuations, according to JPMorgan's Kaustubh Kulkarni.

"The buyers are recalibrating the value they'd like to pay while the sellers are recalibrating whether they are willing to accept the valuations corrected in the public markets," Kulkarni, head of investment banking-India at JPMorgan, told BQ Prime's Niraj Shah on the sidelines of the India Investor Summit.

"Financiers, too, are assessing the amount of capital structure and leverage they are willing to put on targets based on their comfort." The net result is that there is things are moving slow, he said.

The M&A activity levels in India will remain "interesting and robust", he said.

The base level, at which investment banking business is set to operate in the next few years, has already been meaningfully elevated as opposed to where it was four to five years back, he said. According to Kulkarni, this is a reflection of India becoming a larger economy.

M&A or financing activity is possible only in those places where substantial capital has already been invested or substantial investment has been made in the past, he said.

As such, the two big drivers of M&A are state-owned infrastructural assets and private equity, Kulkarni said.

Infrastructural assets are those where the government has already spent enormous amount of funds for development across various categories. And now, given the government's "need" to continue investing in infrastructure, it will have to "free up" the existing capital that it has deployed in the last five years, he said.

According to him, private equity has good scope, looking at the scale at which investment has multiplied in the past few years. This, as per Kulkarni, applies to both mainstream companies as well as venture capital and investors in start-ups.

"As most investors have a finite life for their funds, which they would look forward to monetise, that will give the second big leg to M&A and financing transactions."

"The existing investments made two-five years ago, will search for an exit and return, if not all, but some of the capital to their respective unit/fund holders," he said.

There are also a number of new businesses emerging in the energy consumption space: electric vehicles, batteries, hi-tech manufacturing, among others. These will require substantial capital investment funding, he said, and attract both strategic and financial capital.

The Chinese Factor

There are multiple reasons why large global companies will look at a China plus one strategy, Kulkarni said, especially as India's neighbour slowly vacates labour intensive industries such as textile, gems and jewellery, and chemicals, among others.

China, being the second largest economy, has an enormous domestic demand to cater. "So, fundamentally businesses will continue to operate, maintain, and grow in China because of the kind of demand pull the country attracts," he said.

Still the question of China plus one comes from the view to mitigate disproportionate risk coming from depending on just one particular host country and value chain, as per Kulkarni.

Besides, like India there are many other competitive countries, especially in South Asia, that can provide efficient manpower, industrial space and equipment, larger supplier contracts and more, Kulkarni said.

"Thus, it will ultimately come down to the overall value proposition instead of just labour that India thrives in," he said. "As automation and hi-tech is evolving, it is important to prepare oneself in other aspects too."