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VIEWPOINT: INVESTING IN INDIA’S GROWTH STORY
India is expected to play a greater role in Asia’s economic order, according to 95% of executives in our survey. In this feature, Sourav Mallik, Joint Managing Director at Kotak Investment Banking, discusses India’s business and regulatory environment and how to effectively invest in the country’s growth.
India’s economy and population are growing. Consumer demand is rising. And the government continues to push through reforms to improve the ease of doing business. Indeed, it seems the road is being paved for India to become the main attraction for foreign investors and corporations seeking growth in emerging Asia. Having said that, as with any emerging economy, these developments are very much a work in progress. While policy changes are reshaping and simplifying the business landscape – with the government introducing a new bankruptcy code in 2016 and a universal goods and services tax in 2017 – developing an India strategy requires a rigorous approach that asks several key questions around entry methods, sourcing deals, product selection, and the due diligence process.
While it’s not impossible for foreign corporations to enter the Indian market through a greenfield project, joint ventures (JV) and M&A present more viable options. Aside from access to distribution networks and operating facilities, the true value proposition of an acquisition in India comes from a target’s intangibles: experienced local management teams, reputable and established brands, and contacts in the marketplace. If a JV is the preferred entry route, corporations must start these partnerships by thinking with the end in mind – that is, they need to set up mechanisms and regulate the transfer of shares and shareholdings for after the JV expires. Leaving this open ended can leave investors vulnerable to various risks and disputes.
MARKET ENTRY: JVS AND M&A
30%
of executives say the Indian government is simplifying the process of doing business, compared to 20% with similar opinions toward the Chinese government.
The first challenge for any corporation looking to enter the Indian market is finding a willing seller. This can be a daunting task, however, the biggest obstacles usually come from engaging sellers. Business in India tends to be a family affair, and most targets will be managed by a promoter or a local family that is deeply invested in the company. Building strong relationships – and possibly bringing a recognizable, reputable brand to the table – with these groups is crucial, since many families will place a premium on alternative business considerations not directly related to the deal or valuation.
DEAL ORIGINATION: A FAMILY AFFAIR
When entering new markets that are culturally different to the company’s home market, it is critical to consider how the company's product or service, and, where relevant, its manufacturing practices and raw materials, align with the customs and preferences of the local population. This is particularly relevant for Western companies entering India. In the food industry, in particular, attention to detail in the manufacturing process, food ingredients and marketing of products is critical to avoid damage to brand reputation with the largely vegetarian population. Basing one’s product offering on a solid understanding of India’s market is crucial to growing revenues and expanding market share. Investors must find out the product categories that are most appealing to ensure smooth uptake while reducing the risk of public backlash. Equally, corporations and investors should adapt products to fit a price point that is calibrated for the purchasing power and demands of India’s context. Product design and cost should be optimized through innovation and economies of scale, while pricing products affordably and on par with local market norms.
TAILORING THE PRODUCT PORTFOLIO
The importance of conducting due diligence on a target company or JV partner cannot be overstated. This includes conducting reference checks, getting feedback from the industry at large, and considering the track record of a counterparty’s performance. In closely-held or even medium-sized Indian companies, operating structures are often the product of functional convenience and accounting policies may lack consistency. As such, the quality of a target company’s management and auditor needs to be validated. Gathering information on prospective targets and owners or families can be difficult given various nuances of the market and the sometimes complex ownership networks. Where information is inaccessible or unavailable, experienced M&A advisors with longstanding relationships and knowledge of the market can help ease the process by coordinating transactions.
DUE DILIGENCE: DIG DEEP
Investors must recognize the reality of getting operations running and doing deals in India. They must have patience with unwritten rules and process delays, and may only get to understand the local culture in increments. They should get advisors involved early, while talking to industry peers operating in India.”
Ashok Lalwani, Principal, Singapore and Head of the Global India Practice, Baker McKenzie Wong & Leow
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What else does Ashok Lalwani have to say?
CAPTURING OPPORTUNITIES IN INDIA
M&A and JVs offer access advantages and an enhanced competitive position compared to greenfield investment – however, various factors and risks must be considered before sealing the deal. Relationship building and seller engagement with family-owners often play a more essential part of dealmaking than valuation alone. Customized products that meet the expectations of India’s vast and diverse culture will make the difference between maximized uptake and social backlash. Robust due diligence programs – especially toward closely-held and mid-sized Indian corporations – are the best way to identify risks and red flags that may be uncommon in an investor’s home market.
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