Right time for India Inc to buy companies?

Dec 22, 2011

In this issue:
» Consequences of too much debt
» Mobius believes current crisis not so severe
» US is increasingly adopting protectionist measures
» One more big mistake by the UPA government?
» ...and more!
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There was a time before the financial crisis hit the global economy, when Indian companies were making increasing strides in the global arena. The trend was more evident in the overseas mergers and acquisitions (M&A) space, as Indian companies harboured ambitions of acquiring scale and size and be a force to reckon with. One saw a flurry of deal making especially of the big ticket variety. Thus, you had Tata Motors acquiring luxury brands Jaguar Land Rover and Tata Steel buying out Corus. Big deals were also seen in the IT and pharma space.

But the tide turned and the global crisis wreaked havoc on the economies and markets of countries across the globe, with most in the developed world still struggling to recover. Not surprisingly then, M&A activity by India Inc. has also been on the wane. But there is more to this. It's not just the weak conditions globally that have put a dampener on deals. India, after recovering remarkably well from the global crisis, is now facing a series of headwinds most notably a slowing economy, rising rates and a paralysis in reforms and policy making. Firstpost cites that M&A figures in 2011 have been lower than that in the previous year. Moreover, Grant Thornton's estimates point out that outbound deals this year have fallen rather dramatically to just over US$ 10 bn from US$ 22 bn-plus the previous year. The key here is funding any acquisition. Given the high interest rates and a rapidly depreciating rupee, most Indian companies are choosing to conserve cash and are vary about shopping for companies abroad.

Does that mean that if market sentiments are bullish, India Inc. should go in for a slew of acquisitions? Certainly not, we believe. The strategy that one adopts while acquiring stakes in companies should be akin to that while buying stocks. For starters, companies should acquire only if they believe that the target company is the right fit and will provide various synergies in the future. But more importantly, whatever the market conditions, even if a company has abundant cash or easy access to debt funding, it should not acquire if valuations are expensive. Thus, growth for the sake of growth is a dangerous policy we believe and while a bull run will mask mistakes, a crisis of the sort we have witnessed now will certainly strain balance sheets of most companies, especially those which have made rash decisions on the M&A front.

Do you think that this is the right time for India Inc. to acquire companies? Share with us or post your comments on our Facebook page / Google+ page.

 Chart of the day
With the trade deficit ballooning on account of pressure of oil imports, one factor that helps India's current account is remittances. With many Indians residing abroad, the money that they send back to India plays a significant role in cushioning the country's current account. The Economist reports that India and China are the largest remittance-receiving countries. They are expected to receive US$ 58 bn and US$ 57 bn respectively this year, according to the World Bank. That said, the cost of sending these remittances varies across countries. As today's chart of the day shows, the cost of sending remittances from Japan to India is the highest.

*Cost of sending US$ 200
Data source: The Economist

Have you ever wondered what happens when you buy your most coveted car by way of consumer loan? Or for that matter, the plasma TV in your hall or a brand new tablet? All of these also by way of consumer loan What you are effectively doing is bringing into present, the demand that was supposed to take place sometime in the future. But can you continue doing this month after month? Certainly not. There will come a time when your salary will fail to keep pace with the rising EMIs that you incur to pay off these loans. The end result? You will have to either cut back on your expenses or live a life of austerity till the time your EMIs are paid off or even default in a worst case scenario.

You will be surprised to know that the same logic can be applied to the economies of US and Euro zone. These economies too have brought a lot of future demand into the present and are now staring at the consequences. Fortunately or unfortunately, unlike us lesser mortals, governments like the US have one more option besides defaulting and cutting back. And that answers to the name of printing money. So, come 2012, it will be interesting to see what routes do these economies take. However, if a noted bond manager Jeff Gundlach is to be believed, one should be prepared for both the scenarios i.e. hyperinflation if the Government prints more money and deflation if a default or similar such outcome occurs. Looks like 2012 will be one of the most important years in many years.

The current European debt crisis has gripped the world markets with fear and uncertainty. Majority of the people believe that the crisis has deep impounded roots and a possible default with an abandonment of Euro as a currency is the most feasible long term solution in the hands of policy makers. However, market guru, Mark Mobius feels otherwise. He is of the opinion that the current crisis is not as severe and deep as people are postulating it to be. He further goes on to say that the crisis will be over by June itself! While the statement appears to be quite optimistic we are not sure whether the European Union (EU) will be able to decipher a long term solution in such a short span of time. Until now, liquidity injection by European Central Bank (ECB) had instilled confidence and kept the EU banks afloat. With that about to end now as it fuels inflationary pressures, perhaps the bubble may burst soon. And if it does happen by June it could be testing times for equities.

As recession tightens its grips on the US, the country appears to be increasingly adopting protectionist measures. From hiking visa fees to strong rhetoric, the politicians have resorted to several measures to prevent US companies from off shoring work to countries like India. The latest on the cards is the bipartisan bill that is aimed at punishing those American companies who outsource their telephone call centers to countries like India and Philippines. Such companies would be banned from grants or guaranteed loans from the federal government. And the ban would extend up to five years.

The Bill would also allow US consumers to demand an American representative when they make a call to a call center. If passed, this bill would substantially reduce the off shoring of such call center work by US companies. This in turn would hurt the growth of the BPO (Business Process Outsourcing) centers in India. Though Indian IT companies have been raising their voices against such protectionist practices adopted by the US, they have not been very successful at reversing any of the past decisions as of now. The latest bill would just add to their already growing woes as they are seeing demand slowing down from their biggest markets - the US and Europe.

As if all its mistakes throughout 2011 were pardonable, the UPA government is all set to make the mother of all mistakes in effective governance come 2012. That of being Santa Claus to the country's poor and under nourished. It its bid to secure more votes through populist measures, the government has pushed ahead the Food Security Bill that in all likelihood is set to have disastrous consequences on fiscal balances.

First of all the policymakers seem to be living with the myth that giving free food to the poor will solve the problem of hunger and malnutrition in the country. And what about doing the math on how the government will fund the scheme? Well, that has been left to the tax payers to figure out. However, if things were that simple to govern in an economy of 1.2 bn people belonging to diverse social and economic backgrounds, politics would have been the easiest job out there. Throwing the tax payers' money at every problem cannot be the long term solution has been proven enough by the US' government QE schemes. But unfortunately our government has not taken any lessons! Instead of creating jobs, ensuring higher food productivity and reasonable pricing and effective delivery of food grains across geographies, the government is hell bent on straining the lopsided budget even further. We only hope that the gravity of the problem becomes conspicuous to them sooner than we imagine.

In the meanwhile, the Indian stock markets continued to trade weak with Bharti Airtel and Wipro exerting maximum pressure. Barring FMCG and Pharma, all the sectors were trading in the red. At the time of writing, BSE Sensex was down by 175 points (1.1%). The other Asian stock markets have also been trading weak with Japan leading the losses. The European markets opened on a mixed note.

 Today's Investing Mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham

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5 Responses to "Right time for India Inc to buy companies?"


Dec 26, 2011

Giving food to the needy is better than allowing it to rot.This is what the Supreme Court too pointed out.The food that woyuld be given is the food that is now rotting!


Prasanna Ogale

Dec 23, 2011

Corus was bought by Tata Steel and not Hindalco.


Atulya Kumar Nayak

Dec 22, 2011

i regularly follow your views. wonderfully all you narrates can be understood to very common man.Thanks a lot. can I post a personal view that should it right time to withdraw the ulip plan that now Nav 10.621 that was bought at 11.63, hope for a suggestion.



Dec 22, 2011

There appears to be a synchronised slowdown which may not leave India untouched. The next two years look pretty uncertain what with even IT spend seems to be under cloud.

Money has become scarce and costly. Currency fluctuation risk is also looming large.

This does not seem to be the right time to put precious money into acquistions except for corporates who have low leverage or who are sitting on cash pile.

While the world is not going to come to an end, it would be worthwhile waiting for another quarter or two for prices to move down further (there is anyway no sign of any upmove!).



Dec 22, 2011

i am regular follow your views.i donot invest much in stock market, but i like the game as it is played.

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