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As India receives with much fanfare every morsel of foreign direct investment (FDI), the flow of capital out of the country has quietly accelerated, turning the country into a net exporter of capital, at least for now.
Reserve Bank of India data indicate a steady increase in the FDI outflow: in 2008-09 it was $17.16 billion, in 2010-11 $43.93 billion. Even in the current year, which has seen a deterioration of the global economy, India sent out $15.5 billion (Rs 76,693 crore) in capital in April-August.
Net FDI (capital coming in minus capital going out) gives a better idea of the balance of capital, as it were. In 2008-09, the net FDI was $20.64 billion; in 2010-11 it was a negative $16.93 billion. In other words, last year more capital went out than came in. Ditto so far this year: the net FDI position till August was a negative $1.87 billion.
The result of capital invested abroad is showing up on balance sheets like never before. A McKinsey study holds that about 30 per cent of revenue of India’s top 100 companies comes from abroad. In the seven years to 2009, the share rose from 17 per cent to 29 per cent. The share can only grow, it says.
McKinsey reckons that India’s average outbound FDI is now higher than that of many other developed countries. The reasons have been many — ranging from difficulties at home to the quest for secure supplies of raw materials to spreading business risks across the global geography.here is one more reason alluded to by a Tata Sons director who wishes to remain anonymous — and that is fund-flush Indian companies do not know where to invest in India. Often, problems with land acquisition, water & power connection and environmental clearances come in the way. He sees three primary reasons for heading out: To access raw materials, for market access, or to secure technology.
Neeraj Gupta, Essar executive director, is a little more forthright. He blames the government: “It has stumbled.” Since it has been unable to take decisions for a while, “global-sized Indian companies will invest in whichever markets it makes sense (to do so).”
Two examples of prevarication of the government: A Posco promise of $12 billion FDI in a steel complex still hangs fire six years after the first agreement. Same is the case with an ArcelorMittal project, again in Orissa and again mooted five years ago.
Home-grown companies haven’t fared any better. Tata Chemicals has had to cold-store an urea expansion project in Uttar Pradesh after raising capital through a preferential issue to Tata Sons. Why? Because, the government could not ensure supplies of natural gas, the main input.
So what did Tata Chemcials do? It decided to spend $290 million to acquire 25.1 per cent of a port-based ammonia-urea complex Gabon, Africa.
R Mukundan, managing director, points to the company’s difficulties in expanding in India, and so is looking for opportunities abroad. Gabon, with assured supplies of gas, fits the bill. Later, the company also secured the right to a higher stake in another fertiliser facility at the same complex.
Power projects meet the same fate. New bids for ultra mega power projects are stuck, despite India being power-starved. Policy, rather the lack of it, come in the way. Reforms in distribution need to be addressed before generation capacity can be added, says Banmali Agrawala, Tata Power executive director for strategy and business. Uncertain fuel supplies are also an issue.
Airports developers too are looking out, as airport privatisation is stalled. That sent GMR looking abroad: it got the Istanbul and Male airport contracts. “Growth is why even Tatas and Birlas have gone abroad, backed by financial muscle and capital raising ability,” according to A Subba Rao, GMR’s chief financial officer.
Telecom is also seeing an outflow, as it has hit a plateau here and industry leaders with large cash flows tap undeveloped markets.
The frustrations are felt all round. Recently, a group of industrialists and bankers brought this into focus in an open letter to the government. They pointed to cases of daily harassment faced by small enterprises, and numerous service and manufacturers alike.
Naina Lal Kidwai, director on the Asia Pacific board and India country manager of HSBC, says that if companies are going abroad because conditions are difficult in India, “it’s a matter that needs our immediate attention.”
On top of all the problems of an economic environment gone awry is political interference, as Care Rating chief economist Madan Sabnavis sees it. Foreign countries are welcoming Indian firms with open arms. What’s driving India Inc’s global growth, he says, is the push factor. Acquisitions and mergers have been one manifest of this.
One quest has taken many firms abroad, that is, for raw materials. But India’s inadequacy of reserves (copper, for example) and ecological stumbling blocks to mining are responsible. Witness Vedanta’s tribulations at bauxite hill in Niyamgiri in Orissa.
Coal is another story. There is plenty under India, but are either low grade or cannot be mined for ecological reasons. Securing raw materials is a strong motive for going abroad, says Kidwai. A global supply chain is what many are looking for.
Power projects have bought mines abroad to get round low grades and inadequate supplies at home. Hordes have headed out to South Africa and Indonesia in this quest. Lanco Infratech, GVK and Adani are some of them.
Sometimes, the choice of country is dictated by logistics. The US, Russia and Mongolia may be prospective in coal, but carting that to India for power generation is prohibitively expensive. So Africa, Australia and Indonesia become good options, explains Subba Rao.
Paper and rayon companies too have gone to abroad to acquire pulp mills. The Aditya Birla group is buying Domsjo Fabriker, a Swedish speciality pulp and bio-refinery company, for $340 million. It will help Grasim’s viscose staple fibre business.
In oil and gas, a crucial input, India is not very rich. “So you have to look at other territories to achieve a portfolio of exploration and production blocks,” says Atul Chandra, former chairman of ONGC who is now adviser to Mukesh Ambani on international E&P opportunities.
In all this, India is following in the footsteps of China with a difference. Most of China’s raw material quest is a laid down policy and driven by state-owned companies.
India’s drive for raw materials abroad is led at individual company or group level, though state-owned Indian companies also have had early success. A case in point is ONGC Videsh, which discovered gas fields in Vietnam as far back as in 1992. That was in partnership with British Petroleum and Petro-Vietnam.
Subsequently, the Indian company secured stakes in Sakhalin-1 in eastern Russia, acquired Britain’s Imperial Energy Corporation which owned hydrocarbon fields in Tomsk region of Siberia. In the last, the Indian firm invested $2.1 billion.
A new overseas acquisition spree has begun in the agriculture sector. Companies are going to Africa for large tracts to grow cash crops, fruit and flowers and much more. Getting such huge tracts for contract farming in India is next to impossible.
In pharmaceuticals overseas acquisitions have mainly aimed at market access, and sometimes technology. Pharmaceutical generics and the IT and IT-enabled services industry have ready markets abroad waiting to be tapped. In this, Ranbaxy was a pioneer. It went aggressively into the US and other markets to sell drugs. Cipla and Dr Reddy’s too have done so, sometimes through acquisitions.
In its field NIIT was an early entrant in global markets, investing in Malaysia. Market access was also the objective of a number of acquisitions by software services and BPO firms. Most of the market for most IT firms is abroad. They need a global base to compete.
Mahindra Systech in auto components bought foreign firms with the same purpose in mind. Many others have done so to attain capability and maturity to make high-value parts.
Acquisitions have been a time-tested way of expanding markets. Pravin Shah, Mahindra & Mahindra’s CEO of international operations, offers his company’s experience. China is the second-largest tractor market after India in volume and it has unique cost profiles and applications. M&M wisely decided to acquire a large company and infuse in it its own expertise to improve quality and reliability. This took M&M to the world’s biggest tractor maker position by numbers.
Baba N Kalyani, chairman & managing director of Bharat Forge, approves. Many Indian companies have capability in products, processes and management to be able to see the world as their market. “Investing abroad thus becomes a natural form of capturing new markets.” Shikha Sharma, managing director & CEO of Axis Bank, seconds the view.
The amount invested abroad depends on whether a firm wants to create an Indian base for exports or create a manufacturing base elsewhere to serve the surrounding region. The Jaguar-Land Rover acquisition by Tata Motors is an example. If a Jaguar was to be made in India, it would immediately diminish its appeal, argues Kalyani.
His own Bharat Forge group has four factories in Europe generating a turnover of 400 million euros. The acquisitions helped it to gain customers quicker, with spin-offs like higher exports from its India operations.
In 2002-03 Tata Communications, till then a monopoly provider of international voice calls, faced an existential crisis. It could either compete with other Indian and international providers seek market abroad. The voice market was shrinking and it wanted to expand to data and IT services — but needed technology, talent and intellectual property rights.
It spent $130 million to buy the Tyco Global network and $239 million to buy Teleglobe. The two served the company’s purpose in different ways, according to Vinod Kumar, MD & CEO of Tata Communications.
Tyco made it a global player by providing a global under-sea cable network that continues to be expanded. Teleglobe gave a customer base, market presence and assets.
“With the acquisitions we leveraged our leadership in India and also picked up a deep talent bench around the world,” adds Kumar. It also acquired majority stake in Neotel of South Africa to build a new home market. It gave an insight of how to operate in Africa.
Stable-mate Tata Power, as others, has invested in geo-thermal projects in Indonesia and frontier technologies in Australia to acquire technical knowledge to be used back home. Reliance Industries’ investments in shale gas in the US have the same motive. “We want to learn the business and apply that to India,” says Chandra. Technology garnered abroad is invested back home and used to capture newer markets or markets in the very countries from where it has been acquired in the first place. M&M’s entry into the US tractor market was a means to take a technological lead over its Indian competitors. Thus, the home market saw upgrades to changing emission and safety norms. The same motive underlined M&M’s buy of Ssangyong Motor of South Korea.
Acquisition of brands of foreign companies is another factor, as in the Tata bagging of Tetley. It made Tata Global Beverages the world’s No 2 in branded tea. Similar was the case with Tata Motors’ acquisition of the Jaguar and Land Rover brands. Creating such brands from scratch would have taken Tata Motors decades of hard work.
Indian companies are also active in South America and Africa, doing as many deals as in developed markets, says Kalpana Morparia, CEO of JP Morgan India. But deal values are higher in the latter economies.
The distress of the western economies has been seized by Indians as an opportunity. Agarwala sees in the valuations of many overseas firms some “pretty interesting opportunities.” For example, Essar’s acquisition of Shell’s Stanlow refinery for $350 million. If such a refinery were to be built in India, it would have cost $4 billion.
Videocon sees the same logic. “We got oil stock at a lower value overseas. Hence we went ahead,” says Venugopal Dhoot, Videocon chairman, explaining its quest for acquisitions.
Many see running acquisitions as not too tough an exercise as these tend to be variable cost rather than fixed cost-heavy businesses. This allows flexibility in ramping up or toning down operations. Indians are good at it.
McKinsey says that Indian companies improving performance is more important than capturing economies of scale and scope. Bharat Forge, Mahindra Systech, Hindalco, Tata Motors, Tata Steel and many more have restructured acquired assets to derive more value.
Things may accelerate. With the US faced with the threat of a double-dip recession and the European Union in chaos, more distress sales are expected. It is a matter of timing. “We picked up assets when telecom was in a bit of turmoil. Had we not moved at that time we might have had to pay more to acquire lesser capabilities,” says Kumar of Tata Communications.
Diversification of country risk is another reason for going abroad. Large groups like Bharti, Tatas, Essar, Birlas and Ambani have done that. “Once you become very large you don’t want to put all your eggs in one basket,” offers R Raghuttama Rao, managing director of Icra Management Consultancy services.
Specially in the commodity business, “higher volumes give more leverage in negotiations with vendors and buyers,” according to Gupta.
Risks include political risk, too, which in India is seen to be growing in the oil sector, as the government revisits production-sharing agreements and the dictated customer lists for gas.
Tata Communications’ Kumar also says global operations have given his firm a derisked position and a platform for global growth in new kinds of markets.
Above all, investing overseas does not entail the hassles faced in India. Abroad, the process was easy, transparent and does not need paying obeisance to power that be for securing permissions and resolving issues. At any rate, Indians are great at handling these complex things. “They have the skills to adjust to a culture and geography and competitive business milieu,” says Kalyani.
By being able to source capital from various markets, Indian firms have been able to overcome the handicap of a capital-scarce, high-interest economy.
“Using the strength of an Indian balance sheet you can give guarantees up to 400 per cent your net worth for loans raised by special purpose vehicles overseas. In the ultimate analysis, businesses look at whether they are making comparable spreads between the cost of capital and returns in overseas markets vis-à-vis India. The nominal rates of return do not matter much as long as the spreads are comparable,” says Subba Rao.
That could mean one thing: from a net importer of capital, India could become a net exporter.
Source : mydigitalfc.com
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