Trend 4- Focus on core business
Being a marginal player in any industry is costly today. The ability to compete and be a market leader translates into profits. Having gone through periods of low demand and extended downturn, corporates have learnt the lesson of focusing on their competitive strengths. Conglomerates with large number of business cannot possibly dedicate time to non-core business that do not generate adequate profits. It becomes a virtuous cycle and lack of focus leads to deterioration of business inspite of possessing the ingredients and potential to do well. While there are others in the same industry for whom the business could be core mainstay business. These businesses have tremendous potential in right hands having a stricter focus and thus, it makes sense for conglomerates to right size and have these inefficiently run capacities sold to more efficient players. Additionally, shareholder’s activism may increasingly demand management to explain presence in certain non-core businesses.
The GDP growth rate has been promising and there is strong business confidence. Capex cycle has not picked up and domestic players are more comfortable resorting to consolidation in the industry through M&A in order to grow.
Trend 5- Stars of yesterday may need to take tough calls
Pharmaceutical and IT sectors have had a great run till the US adopted protectionist approach affecting the sectors. For the first time, the growth in these sectors is decelerating and margins are falling. Over the last couple of quarters, Pharma has seen a setback in its core business with a slowdown in US sales. In addition, cautious outlook on IT spending in some of the key verticals like retail, life sciences and hi tech; renders a bearish view on FY18 as well. Overall, these sectors have seen a dent in profitability and revenue growth falling to lower single digit from high teen growth seen in FY16.
With shrinking organic business, they are likely to evaluate options of consolidation. It provides an excellent opportunity to large global generic players to further consolidate their position in India. There could be domestic consolidation in both these sectors in order to grow and strengthen competitive position.
In conclusion, we are entering an M&A supercycle in a growing economy which provides huge consolidation potential. Government is focusing on being enabler, making structural and cultural changes to ensure growth, efficiency and innovation. Many can benefit using M&A as a tool to capitalize on this new potential.
Ashish Adukia, President and Head, Group Corporate Finance, Aditya Birla Group writes this piece for the July 2017 edition of our Financial Foresights.
