Number of LBOs in Last Decade Highest Since 1991 Reforms - Chart Of The Day 16 July 2016 - Equitymaster

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Number of LBOs in Last Decade Highest Since 1991 Reforms
Jul 16, 2016

Indian businesses are perceived to be less risk tolerant than their counterparts in the West. But if the data on acquisitions are anything to go by, the risk appetite of Indian Inc. has gone several notches higher in the past decade. In fact, data since 2007 shows that companies in India acquired businesses with the help of huge debt. The number of such acquisitions in last 10 years have been the highest since 1991 reforms.

One would recall Indian companies fetching the MNC tag with the likes of Tata Steel, Hindalco, Tata Motors and Indian Hotels going in big ticket acquisitions in 2007-08. The fate of most of the acquisitions did not turn out as expected. Other than Tata Motors the profits of none of the other companies are anything to write home about. The Tata group has in fact been restructuring its business to shed debt and get rid of the acquired assets.

However, the desire to grow and diversify with debt does not seem to have faded.

The latest instance of mid-sized detergent company Nirma acquiring huge cement capacity with debt is a case in point. While this certainly reaffirms the growth potential of smaller companies in India, it does not always serve the interest of shareholders. Therefore such high debt acquisitions must draw concern about the cash flows of the company post acquisition. And if not satisfactory, investors must avoid getting carried away by the growth and diversification prospects.

Data Source: Thomson Reuters, Livemint
*Year to date

This Chart Of The Day was published in The 5 Minute WrapUp - Who Says Warren Buffett Doesn't Invest In Real Estate?

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