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India - Why Indian firms are shopping abroad

A weak rupee is not deterring Indian companies from buying businesses overseas. Apollo Tyres’ acquisition of Cooper Tires for a whopping $2.5 billion is the most recent instance. This took place at a steep premium, even as the rupee was flirting with its lifetime low.

Data from analytics firm Grant Thornton show that Indian companies spent $14 billion on foreign acquisitions in 2012 — higher by 27 per cent than in 2011. This was also the year that witnessed a sharp depreciation in the rupee, which slipped from 46.5 to 53.4 to a dollar — a 15 per cent fall. In 2013, including the Apollo Tyres deal, Indian players have spent close to $3.5 billion so far, which is a sharp 72 per cent increase over the same period last year. This is despite the rupee plunging to near-59 levels last week.

This situation is in sharp contrast to the past, when overseas acquisitions dipped as the rupee depreciated and picked up as the unit strengthened. In 2007, as the rupee appreciated from 45.3 to a dollar to 41.3, Indian companies made a beeline to buy businesses abroad, spending $33 billion in overseas investments that year. One such landmark deal was Tata Steel’s acquisition of Anglo-Dutch steel maker Corus for over $12 billion.

The same trend played out in 2010, when the rupee’s appreciation was accompanied by a sharp surge in foreign acquisitions, worth $22 billion. This was the year Bharti bought South Africa’s Zain for $10.7 billion.
Why go abroad

But why are companies so keen to diversify abroad now, despite the weak rupee? One motive could be to diversify revenues from India, where business seems to be dull. Venturing overseas gives companies access to new markets, such as a larger market for radial tyres for Apollo. Apollo Tyres expects to get 50-60 per cent of its consolidated revenues from the US and Europe once this deal is through.

This also ensures that the company will earn a majority of its revenues in foreign currency.

Onkar S. Kanwar, Chairman, Apollo Tyres, justifies the buy saying: “The combined company will be uniquely positioned to address large, established markets, such as the US and Europe, as well as the fast-growing markets of India, China, Africa, and Latin America, where there is significant potential for further growth.”

“Most of the recent transactions were driven by fundamental strategic reasons, such as market expansion, new brands and technology, forward or backward integration, etc. Of course, managing currency exposures is critical since un-hedged positions can prove costly, and there are enough examples of such mistakes” says Rajendra Nalam, Partner, BMR Advisors.

Easier availability of natural resources or raw materials could be another reason, as most sectors in India continue to scramble for key inputs, points out another expert from an M&A advisory firm.

The ability to raise low-cost funds overseas is a big draw too. “Easy accessibility and low cost of debt capital through financial institutions in the international market is one of the prime factors leading to the maximum number of overseas acquisitions by Indian corporates”, says a report published by KPMG and Assocham.

Source: Opens external link in new windowthehindubusinessline.com

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