Q1 deal activity jumps three times year on year: Grant Thornton

The first quarter of FY17 saw frenzied activity in the deal space with landmark deals like the Vodafone Idea merger stealing the limelight. CNBC-TV18 catches up with Prashant Mehra Partner at Grant Thornton to find what has been driving deal activity, to determine the trends in the sector and to get a sense of what lies ahead in the M&A space.

Below is the verbatim transcript of the interview.

Q: The Vodafone merger with Idea Cellular was obviously the big story in that space. So, consolidation seemed to be the big theme in the first quarter of FY17. Do you expect that theme to continue going forward?

A: Yes, of course. As you rightly mentioned, the Vodafone-Idea merger which is valued at about USD 27 billion or so was a chunk of the USD 34 billion activity which we saw in the quarter. We have been mentioning this over the last previous quarters that consolidation will really drive the deal activity in the country for 2017 and possibly going forward as well. This is a huge transaction, probably a milestone transaction in the telecom space.

And we will continue to see such transactions in other key sectors as well which are core specifically, the technology sector which is e-commerce, we were already talking about some large transaction playing there, more so in the pharmaceutical sector as well. We will see consolidation in he otherwise the telecom sector, the infrastructure sector. But specifically on the financial sector, post demonetisation we are seeing some emerging business trends.

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Prashant Mehra

Partner|Grant Thornton

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Non-banking finance companies (NBFC) are continuing their drive on fund raising. And microfinance firms are also on a consolidation rise. So yes, the theme is here to stay and will perhaps continue for the remaining part of the year at least.

Q: In your report, you mentioned that big ticket investment in the private equity space is at the lowest in 11 months. What do you think is driving investment lower?

A: It is a little strange because the macroeconomic factors are all positive. The real reason why there has been tepid growth in the private equity space which is just about USD 2 billion in this quarter which is 30 percent below what it was in the same period last year. What is really driving this is private equities being cautious in their pet space which is e-commerce.

But interestingly, where there are big private equity and venture capitalist (VC) players not making investments, we are seeing an emerging trend where early stage private equities, VC as well as seed stage investors increasing their volumes and backing startups. And the volumes have been much higher than what they have been in the previous quarter.

So interesting dynamics there. But going forward, companies which are hoping to raise big money from large venture capital and private equity firms will perhaps struggle for a few quarters still.

Q: The big landmark event coming up, the stipulated date is July 1 for the goods and services tax (GST) rollout. What kind of impact do you see of the GST on deal activity going forward?

A: We have been really waiting for GST to come. It has finally been announced and hopefully we will have a rollout from July 1. It is a much awaited milestone event. On all aspects of deal making whether it is foreign investment into India, whether it is domestic consolidation or whether it is private equity investments, it affects the manufacturing as well as the services sector. So, we will see some real interesting times in deal activity picking up in or around or even post the GST rollout.

It is going to make some significant changes in the business models which are being floated by various sectors. And of course, it brings about uniform taxation. The visibility for growth, the planning for growth will be better with GST which is a key factor for investments and deal making.

Q: Any particular sectors in your mind that might benefit more once GST is rolled out?

A: The manufacturing sector obviously. There are a lot of intermediary taxes which make the goods more expensive in the hands of the consumer. So there are elements of services there, there are elements of manufacturing there as well. So, goods in general, the manufacturing industry is perhaps to benefit the most. I am not too sure if it will make such a big impact for services, but anything to do with manufacturing will definitely benefit from GST.