India – UK M&A: The Empire Strikes Back

Indian companies will likely spend more than $10 billion on acquisitions in Europe this year, accounting for almost 90% of their total overseas acquisitions. Europe’s diversity makes it a tough market to crack by organic means alone so Indian firms have taken the acquisition route. They spent $2.68 billion during the first half of 2006 on 32 acquisitions of European firms, i.e. two thirds of the $4 billion spent by Indian companies on 85 overseas acquisitions.

Trade between India and Europe is expected to multiply five times to $100 billion by 2010 from current level of $20 billion, according to industry estimates. Propelling this growth is increasing merger and acquisition activity between companies in the two regions.

The most favored acquisition and investment targets are U.K. companies, helped by a common English language, similar accounting and legal systems and relatively flexible U.K. labor laws. Indian companies invested about $2 billion in the U.K. last financial year, more than twice the previous year. As a clear sign of trend-reversal, it surpassed the investment made by British companies in India.

That figure does not include the latest and largest ever acquisition by an Indian firm: the purchase by India’s Tata Steel Ltd of the U.K.’s top steel maker Corus Group Plc, a company more than three times its size for $8 billion.

Tata Steel’s parent namesake company Tata Sons Ltd, with revenue of $22 billion and equivalent to about 2.8% of the country's GDP, will lead the M&A league table with its acquisition of Corus Group Plc. The Tata Group had previously acquired the U.K.-based Tetley Group, then the world’s largest manufacturer of tea, for $407 million in February 2000.

The Corus acquisition will give Tata Steel the size and scale to be globally competitive in a consolidating steel industry. Tata Steel will become the world's fifth largest steel producer with a capacity of about 26 million tons and combined sales of $24.4 billion.

India - U.K. Trade: The Corridor Widens

The growing bilateral trade between the U.K. and India became clear this year when the two countries emerged as the third largest overseas investors in each other. There has been almost three-fold increase in the number of projects announced by Indian companies in the U.K. in first six months of 2006. The number of U.K. projects financed by Indian companies doubled to 76 creating 1,449 new jobs. The number of Indian companies that started U.K. operations grew by 23% last year.

To add to that, more than 500 Indian companies have a presence in London, of which 30 companies have listed shares on the London Stock Exchange. That’s greater than the total number of Indian companies listed on the New York Stock Exchange (NYSE) and NASDAQ combined.

Such progressive trends prompted the third annual summit between the Indian Prime Minister Manmohan Singh and the Prime Minister of U.K. Tony Blair in London on October 10, 2006. Government and trade bodies can do more, however, to encourage bilateral business.

While Indian industries such as information technology, pharmaceuticals and engineering have received significant investments, there are sectors such as infrastructure, energy and real estate that offer investment opportunities to the extent of $150 billion, $73 billion and $50 billion respectively over the next five years.

Further, if Indian companies could simultaneously list shares on both the Bombay and London Stock Exchanges, for example, access to capital and investment opportunities would be better for both sides. It could make London to India what Hong Kong is to China.

Stock Market: Growth Factored In

With corporate India currently announcing its results for the second quarter of the current fiscal year, investor apprehensions about the valuation of public companies seem to have been put to rest and their confidence strengthened.

The top five Indian IT services companies, namely Tata Consultancy Services, Infosys Technologies, Wipro Ltd, Satyam Computer Services and HCL Technologies produced strong quarterly numbers, better than what analysts predicted. The companies reported an average growth of 39% in revenue and 41% in net income during the second quarter ended September 2006.

Growth expectations are reflected in India’s IT stocks. Take India’s top four IT services companies: TCS, Wipro, Infosys and Cognizant Technology Solutions. They have combined annual revenue of $11 billion and an aggregate market capitalization of $73 billion. That dwarfs the top five U.S. companies Accenture, Amdocs Ltd, Computer Sciences Corporation and Electronic Data Systems Corporation and Europe’s biggest IT services company CapGemini put together, which have total annual revenue of $67 billion and a combined market cap of $65 billion.

This growth is not limited to the tier-1 IT companies only. Some of the mid-size IT services companies are displaying similar growth. We discuss these results in detail in our Special Report.

India’s growth is spread beyond the IT industry. Reliance Industries Ltd, a diversified manufacturing company which makes products ranging from chemicals to textiles to become India's most valuable firm with a market cap of $37 billion, grew better-than-expected 37% in sales and 9% in net income during the quarter. ICICI Bank, India’s largest private sector bank, reported a 30% surge in profit. Grasim Industries Ltd, one of the country’s largest cement producers, doubled its profit in the second quarter. Ranbaxy Laboratories Ltd, India’s largest pharmaceuticals company by sales, increased its profit by more than six times and sales by 26%. Cipla Ltd, the second largest drug-maker, registered 47% growth in its profit.

During the first quarter ended June 2006, the companies included in the Bombay Stock Exchange’s benchmark index Sensex, grew about 25% in profit and about 30% in sales compared with the same quarter previous year.

A clear consequence of this growth, buoyed by increasing M&A activity, is that India’s mid-sized companies are becoming large cap stocks. And the existing large ones are becoming truly global.

Bundeep Singh Rangar
Chairman, IndusView
Bundeep.Rangar@IndusView.com
www.indusview.com