M&A Outlook 2024

In a global landscape where mergers and acquisitions (M&A) experienced a downturn, with deal value halving in 2023 compared to 2021 and deal volume declining by 17% during the same period, India witnessed an uptick in M&A activity. Following a slowdown from the second half of 2022, the deal landscape in India regained its upward trajectory in the last quarter of 2023. There were 164 deals valued at $4.1 billion in Q4 2023, showing a growth of 5.1% in both the total value and volume of deals compared to Q4 2022, along with an 18% surge in deal volume from Q3 2023.

In Q4 2023, there was an upward trend in M&A deal volumes in the range of US$5 million to US$25 million and US$100 million to US$1 billion, compared to Q4 2022. Deals valued between US$5 million and US$25 million saw a 20.83% increase, while those between US$100 million and US$1 billion experienced a significant surge of 71.4%. Conversely, the US$25 million to US$100 million category witnessed the most substantial decline, shrinking by 30.77% from Q4 2022 to Q4 2023.

Key drivers behind India’s M&A market include solid corporate balance sheets, private equity having ample dry powder to deploy, the subcontinent becoming a global hotspot for non-US capital, and conglomerates increasingly turning to M&A to win future profit pools.

Within sectors, renewable energy, infrastructure, logistics, and manufacturing have performed well, making up one-third of all deals over the past 18 months. Healthcare has also shown strong growth, with deal volumes consistently rising over the past five years, driven by the availability of quality assets and a positive sector outlook. Since January 2022, the cumulative M&A deal value in India's healthcare sector reached US$15 billion, further solidifying its importance in driving M&A activity in the country.

Future Prospects for M&A

With the positive momentum evident in the last quarter of 2023 and the fundamental growth drivers of M&A intact, the outlook for M&A activity in 2024 remains robust. Supported by India’s strong economic fundamentals, controlled inflation, healthy corporate balance sheets, and China plus one strategy of multinational companies.

Drivers of deal-making

India’s strong economic fundamentals

India is on an upward trajectory as an economic centre and is an attractive option for domestic and international businesses. The growth rate of India has been at a staggering 6-7% while the rest of the world, developed states included, would have an average growth rate of about 3%. India's stable socio-political-economic-regulatory environment has helped attract new investments. Improving infrastructure will further stimulate investor interest in energy, real estate, construction, industry, and healthcare sectors.

Controlled inflation

The Reserve Bank of India has taken measures to stabilise food and oil supply shocks, preventing them from inflating consumer prices. Despite expectations of high food inflation in the first half of 2024, economists anticipate year-over-year headline inflation at 5.4%. While this may hold back interest rate cuts in the first half of 2024, there is a possibility of 25 basis points of policy rate cuts in the third and fourth quarters.

Strong corporate balance sheets

Indian companies have steadily strengthened their balance sheets post pandemic. They now exhibit robust financial standing, boasting significant revenues, manageable debt levels and high interest cover. The interest coverage ratio of India Inc has increased from from 2.3 in FY 21 to 3.5 in FY 2023, along with a reduction in debt-to-equity ratio from 1 to 0.8 during the same period. These strong balance sheets empower companies to confidently pursue growth opportunities, including M&A activities while maintaining financial stability.

China plus one policy

With organisations and nations increasingly embracing the "China plus one" policy to secure supply chains, India emerges as an appealing destination due to its combination of low wages, skilled workforce, and favourable policies.

Major M&A themes

Although India is performing relatively well in managing disruptive changes, the outlook of companies are influenced by the uncertain state of the rest of world. The volume of smaller and mid-sized deals are on the rise as companies are now looking at M&As as strategic stepping stones instead of a large-scale, disruptive change.

2024 is likely to be packed with M&A deals that strategically add value to firms. Three major areas that have the potential to do so across business of varying sectors are tech-based innovation, ESG and supply chain resilience.

Tech-based Innovation

With AI becoming increasingly efficient, companies have started recognising the value of incorporating generative artificial intelligence to enhance business operations. Between 2022 and 2030, M&As linked with AI is projected to have a compounded annual growth rate of 37%.

Along with AI, the world of tech is limitless when it comes to innovation and M&As are likely wherever companies see value. M&As related to technology often come to play when businesses are able to solve a problem or add value through the deal.

ESG

With consumer preferences and an increased awareness about sustainability, CSR and the impact of businesses on society as a whole, businesses are now moving closer to incorporating ESG principles not as an addition to, but a key element of their business model. Businesses are likely to seek M&A opportunities that will add value on these fronts. Government regulations and the unsaid expectations from a business will nudge businesses in this direction.

Supply Chain Resilience

The importance of building a resilient supply chain was brought to light in the past few years with the pandemic, geo-political tensions and other disruptions. Being able to withstand these sudden changes is important for the success of any business. M&As, domestic and cross-border are likely to build this for businesses based on infrastructure, expertise and connections. 2024 is likely to be yet another year wherein businesses strategically invest in M&A deals that strengthen their supply chain.

Sectoral dynamics for M&A

On the sectoral front, 2024 will witness further M&A activity in the healthcare, green energy and consumer goods sector.

Healthcare

The Indian healthcare sector experienced a 66% increase in deal value between Q3 of 2022 and Q3 of 2023 along with a 18% increase in deal volume. Scale, efficiency and quality lie at the core of M&A deals in the healthcare sector. Hence it is likely that investors would lean towards deals that add synergistic value. PE deals in this sector are already on the rise, possibly stemming from tech-based innovations.

Green Energy

In 2022, 50% of Asia’s clean energy deal value came from India. The Indian government’s ambitious target to mover towards green energy along with ESG guidelines and regulations for businesses act as a fuel for these deals. Not only will businesses act on this out of necessity, but they will also strengthen the value of their firm as a result. Investing in ESG is comparable to future-proofing a business model and the regulations are likely to nudge the businesses to do so, possibly through mergers and acquisitions.

Consumer Goods

Consumer preferences are constantly changing and businesses must adapt to sustain their growth. Because of the seemingly unpredictable nature of consumer preferences, investors often steer away from large deals. Smaller, strategic deals are the ones they seek. Between Q3 2022 and Q3 2023, the discretionary consumer goods sector experienced a 94% increase in deal value while the consumer staples sector experienced a 91% increase. Startups have become a centre of attraction for many companies, especially those that disrupt industries and come with a solid value proposition. An important point companies look out for is how the smaller firms synergise with their existing operations to get the highest ROI.

Conclusion

India has been able to defy challenges that have emerged over the past few years - volatile economic conditions and geo-political tensions, to name a few. Despite the disruptions, the Indian economy has continued to thrive, making it an attractive option for businesses worldwide. We are likely to see a growth in M&A activity in India this year. Businesses are likely to take advantage of new innovations in tech, consider investing in ESG and strengthen their supply chain.