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Diageo to Qatar Pouncing on India as Debt Woes Weigh on Sellers

Diageo to Qatar Pouncing on India as Debt Woes Weigh on Sellers

India’s economy is growing at the slowest pace in a decade, companies are burdened by record debt and governance is so bad that even local cement billionaire Kumar Mangalam Birla is reluctant to invest in the country. Yet some foreign entities, from Diageo Plc (DGE) to Qatar’s government, are undaunted, finding buying opportunities as Indian firms look to shed assets to free up cash. Inbound acquisitions of Indian assets reached $9.9 billion in the first half, the most for a six-month period in two years, data compiled by Bloomberg show. A tumbling Indian currency and falling valuations have made deals cheaper for overseas companies, who are drawn by the long-term promise of rising consumption by a swelling middle class. More transactions may come as Indian companies from Reliance Communications Ltd. to DLF Ltd. (DLFU) prepare to sell assets. “This is a good time for international companies to look at India,” said Ajay Saraf, head of investment banking at ICICI Securities Ltd. in Mumbai. “Indian corporate owners are more open to dialogue than before.” That was the case with liquor baron Vijay Mallya, who sold a stake in United Spirits Ltd. (UNSP), the maker of Bagpiper whiskey, to London-based Diageo. Mallya had been under financial pressure after his Kingfisher Airlines Ltd. (KAIR) had racked up more debt than it could repay. The transaction gave Diageo, the world’s biggest distiller, effective control of United Spirits.Bharti Sale

Bharti Airtel Ltd. (BHARTI), India’s largest mobile-phone operator, in May agreed to sell a 5 percent stake for $1.26 billion to the Qatar Foundation Endowment, the investment arm of the state-controlled Qatar Foundation. Billionaire Chairman Sunil Mittal has seen Bharti’s debt climb almost sevenfold since 2010, according to data compiled by Bloomberg.

Mallya and Bharti aren’t alone in gorging on loans. Net debt at Indian companies, excluding banks and financial firms, on the S&P BSE200 index more than doubled to $196 billion as of Dec. 31 from the end of 2008, data compiled by Bloomberg show.

“A slowing economy forces many Indian companies to concentrate on the core businesses and to take steps to pare down debt,” said A Krishna Kumar, head of domestic banking at State Bank of India, the nation’s largest lender, in an interview.

Cheaper Valuations

The falling currency has played into the hands of foreign buyers. The Indian rupee has slumped 26 percent in the past two years, hitting a record low against the dollar on Aug. 6.

“Deals that two to three years ago sounded a bit pricey are now a lot more accessible with the help of the currency,” said David Gaud, senior portfolio manager at the asset management unit of Edmond de Rothschild Group, which oversees more than $157 billion.

At the same time, valuations have dropped. Companies on India’s benchmark Sensex Index trade at an average 13.3 times projected full-year earnings, down 26 percent from a 2009 peak, data compiled by Bloomberg show. That remains higher than valuations of companies in other emerging markets, such as China.

This year’s biggest inbound deal was Unilever Plc’s 2.45 billion-euro ($3.3 billion) agreement to raise its majority holding in Hindustan Unilever Ltd. (HUVR) to about two-thirds, data compiled by Bloomberg show.

The asset sales come amid the most challenging financial conditions for Indian companies in more than a decade, according to a July 17 report by India Ratings & Research, the local unit of Fitch Ratings. Cash flows haven’t kept pace with the increase in corporate debt, making it harder for companies to service loans, India Ratings said.

Birla Cautious

The financial gloom has hurt outbound deals, with Indian companies announcing $4.4 billion of acquisitions abroad in the first half, down from $9.1 billion in the previous six months, data compiled by Bloomberg show.

India’s economic expansion has held below 5 percent for two straight quarters, trailing growth in China by about 3 percentage points, as Prime Minister Manmohan Singh struggles to revive investment. At the same time, Singh’s administration has been paralyzed by a series of corruption allegations.

Kumar Birla, who runs companies including the world’s largest rolled aluminum maker and India’s biggest cement manufacturer, said in March that lack of transparency in government policy made him prefer to invest in other emerging markets like Brazil. Birla has a net worth of $8.2 billion, according to the Bloomberg Billionaires Index.

Middle Class

While domestic companies remain pressured, foreign chief executive officers including Nissan Motor Co.’s Carlos Ghosn cite the vast potential of a middle class that is expected to stoke demand for everything from cars to beer.

PricewaterhouseCoopers estimates India will have 600 million middle-class consumers by 2021, more than the combined population of the U.S. and Indonesia. Growth in consumer spending will average 8.9 percent in the next five years, compared with 4.6 percent in the U.S. and 3.9 percent in the U.K., according to market researcher Euromonitor.

Ghosn says there are 15 cars per 1,000 people in India, compared with 200 in Brazil, 500 in Europe and 800 in the U.S.

“There is no way that the car industry will regress in a country like India,” Ghosn said in a July 16 interview with Bloomberg TV India.

Circling Reliance

Meanwhile, the pace of inbound deals is set to continue this year and next, according to Edmond de Rothschild’s Gaud.

Foreign companies are circling Reliance Communications Ltd. (RCOM), the phone company controlled by billionaire Anil Ambani. Reliance is under pressure to reduce debt that jumped to 415 billion rupees ($6.8 billion) on March 31 from 119 billion rupees in June 2006.

The company is in talks to sell a stake in telecom services unit Reliance Globalcom to Dubai-based Samena Capital, according to a statement in April. It also held talks this year to sell a stake to South Africa’s MTN Group Ltd., though those discussions have stalled, according to people with knowledge of the matter.

Rajeev Narayan, a spokesman for Reliance Communications, didn’t respond to an e-mail and a call seeking comment. An e-mail to MTN’s press office went unanswered.

DLF, India’s largest developer, said July 25 that it’s selling “non-core” assets after debt almost doubled in the past five years. The company has been trying to divest luxury-hotel chain Amanresorts International Pte since at least 2010.

“Overseas corporates will benefit from a weaker currency and also stand a good chance to get assets which are relatively well-managed, not very expensive, and get superior returns from what you find in the region,” Gaud said. “India is a place where companies are happy to currently make acquisitions.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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