X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Markets: The global theme... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 6, 2007

    Markets: The global theme...

    'Being global' is proving to be the new mantra for Indian corporates. Be it in software, pharma, steel, auto and the like, the 'global' fever has been catching on and India Inc. is slowly emerging as a force to reckon with on the global map. While M&A as a theme comes as the most foremost in mind, companies are also establishing a footprint in the global arena through the organic route. Here, we take a look at two such strategies, namely 'M&A' and 'outsourcing', which at present are at the forefront of India's global growth story.

    Mergers and acquisitions: There has been increased activity on the global M&A front by Indian companies in recent times and this phenomenon has not been restricted to only a few sectors but across sectors such as pharma, FMCG, steel, auto and the like. Some of the factors driving acquisitions are as follows:

    • Acquiring scale: Acquiring 'size and scale' is one of the primary reasons that have prompted Indian companies to go in for mergers and this has been more pronounced in industries, which are highly fragmented and competitive. Scale also enables companies to gain bargaining power with the distribution chain and also have some level of pricing power. Case in point is the recent acquisition of Corus by Tata Steel making the latter the fifth largest steel company in the world.

    • Increasing geographical reach: Acquisitions also provide a faster way to gain foothold in a market where a company has virtually no presence as against starting operations in a particular geography right from scratch (the latter would take a relatively longer time to scale up). Case in point is Dr.reddy's acquisition of Betapharm providing a vehicle to the former for foraying into the German generics market, which is the largest generics market in Europe.

    • Backward integration: Backward integration in terms of securing raw material is another rationale behind an acquisition in the international markets. For instance, BILT recently acquired the Malaysian company Sabah Forest Industries (SFI), primarily for the purpose of securing pulp, given the firm trend in global pulp prices, which is a key raw material for the manufacture of paper.

    Outsourcing: India has fast been emerging as a favourable 'outsourcing' destination for various reasons, which include the low cost advantage that the country enjoys, English speaking proficiency, domain skills and expertise but more importantly also for its strong manufacturing capabilities. This trend has been very evident in the software, pharma and auto ancilliaries sectors and has largely contributed in driving the overall performance of these sectors.

    The other side of the coin...
    However, both the above strategies are not without their fair share of challenges, which are enumerated below:

    Likely restructuring: While global mergers do add scale and depth to the level of operations of the acquiring company, sometimes the level of restructuring to be done is likely to hamper the latter's profitability in the medium term. For instance, while Asian Paints has acquired a 51% stake in Berger International, the latter still does not make a meaningful contribution to the consolidated bottomline of Asian Paints due to the underperformance of its South East Asian operations. While restructuring is in process, it will be a while before there is a turnaround in these operations.

    High level of competition: Competition is an integral feature while competing in the global arena and certainly cannot be taken lightly. For instance, while India enjoys considerable advantages enabling it to capitalise on the 'outsourcing' story, it nevertheless faces stiff competition from other countries. Besides this, while low cost advantage is one of the major factors driving the outsourcing story, the gap is narrowing down, which means that Indian companies will have to move up the value chain if they want to effectively compete in the global market. To put things in perspective, in the contract research and manufacturing segment, while domestic pharma companies currently have the upper hand in allying with global innovators, countries such as China are expected to bridge the gap in around 5 to 6 years. Similarly, on the M&A front, increased competition means more players are vying for the same potential target leading to a spike in valuations.

    Looking ahead...
    Post the 1991 crisis, India has made increasing efforts to integrate itself with the global economy. While the earlier efforts were towards encouraging global companies to set shop on the Indian soil, in recent times, Indian companies themselves are taking the initiative to establish a presence abroad. Having said that, the domestic market cannot be ignored and companies need to first have a considerable presence in the domestic market before they venture abroad. Also, risks pertaining to integration and the increasing competition are other factors that need to be considered.

     

     

    Equitymaster requests your view! Post a comment on "Markets: The global theme...". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS