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Deal-making Activities Plunge 51% to $83.8 billion in 2023

Analysis of the Plunging Dealmaking Activity in India and Its Impacts on Industries, Stocks, and Retail Investors

Source: According to a report by LSEG Deals Intelligence (January 5, 2024)

Retail Investors’ Perspective

The sharp 51% decline in deal values involving Indian companies in 2023, reaching a three-year low of $83.8 billion, signals subdued business sentiment amid global economic challenges. Retail investors should anticipate increased market volatility and downside risks in Indian stocks, particularly in interest rate-sensitive sectors. While corrections are expected, long-term investors can focus on quality companies with robust fundamentals, especially in the financial services sector, where consolidation opportunities may arise. Market leaders across industries remain resilient and could gain market share during these uncertain times.

Deal-making Activities Plunge 51% to $83.8 billion in 2023

Industry Impact

The funding slowdown will adversely affect capital-intensive sectors that heavily rely on external financing for projects and expansions, including infrastructure, real estate, manufacturing, and energy. However, defensive sectors such as healthcare, utilities, telecom, and consumer staples may benefit. Overheated sectors like tech and crypto-related startups might see a pullback in valuations, presenting long-term opportunities. Consolidation, especially in financial services, is anticipated as a result of reduced funding availability. Distressed assets may stimulate long-term returns for patient investors once the economic cycle turns.

Long-Term Benefits and Negatives

The dealmaking slowdown reflects a correction of overheated asset prices to align with India’s real GDP growth trajectory. Sustainably priced assets will lay the foundation for India’s next growth phase. However, near-term uncertainty may lead to deferred investments, hiring freezes, and moderate job losses. Lower deal volumes will slow credit growth, affecting demand, yet India’s robust domestic consumption and services sectors provide underlying resilience. Distressed assets could yield long-term returns, but the funding environment poses challenges for startups and venture capital.

Short-Term Benefits and Negatives

In the next 6-12 months, investors should prepare for significant stock market volatility, particularly in rate-sensitive sectors. Lower deal volumes suggest limited earnings growth potential for mid-cap and small-cap stocks. Quality large caps should be prioritized, while sectors like IT services and pharmaceuticals may face margin pressures. Banks and NBFCs are likely to turn risk-averse, impacting borrowing costs and liquidity for real estate developers. Resilient sectors such as defense, telecom, and utilities may prove advantageous. While short-term challenges persist, India’s positive long-term structural story, driven by favorable demographics and ongoing reforms, remains intact.

Impact of Deal-Making Plunge on Companies:

Indian Companies:

Gaining:

  • Mid-market companies: With large deals dwindling, investors may turn their attention to smaller, promising companies. They may see increased funding opportunities and valuations due to less competition for capital.
  • Debt-free, healthy companies: With investors scrutinizing risks more, companies with strong fundamentals and low debt will likely attract investments despite the decline in overall deal volume.
  • M&A advisors, boutique investment banks: As complex mega-deals decline, these firms may see increased demand for their expertise in handling smaller, but strategically important mergers and acquisitions.

Losing:

  • Investment banks focused on large deals: The decline in mega-deals will directly impact their fee income and overall profitability.
  • Startups in late stages: With funding drying up, late-stage startups relying on large investment rounds may face challenges in scaling up or even staying afloat.
  • Companies in heavily-funded sectors: Sectors like edtech and crypto that saw a frenzy of investment in recent years may experience a significant slowdown, impacting valuations and growth prospects of companies in those sectors.

Global Companies:

Gaining:

  • Private equity firms: With valuations of Indian companies potentially dropping due to the funding slowdown, private equity firms may see lucrative opportunities for acquisitions or buyouts.
  • Global firms in mid-market segments: Similar to Indian mid-market companies, global players in these segments may benefit from increased investor interest and potentially gain market share from larger competitors.
  • Consultancy firms specializing in cost optimization: The funding winter may encourage Indian companies to focus on cost-cutting and efficiency measures, leading to increased demand for such consulting services.

Losing:

  • Global investment banks heavily reliant on Indian market: Large global banks with significant exposure to the Indian market may face revenue and profitability challenges due to the overall decline in deal-making activity.
  • Multinational companies targeting acquisitions in India: With Indian companies becoming more cautious about M&A, they may find it harder to identify suitable targets or face higher valuation demands.
  • Global VC firms heavily invested in late-stage Indian startups: Similar to Indian late-stage startups, global VC firms with significant investments in this segment may face challenges due to funding slowdown and potentially lower exits.

Market Sentiment:

The news of a 51% decline in deal-making is likely to dampen market sentiment initially, particularly for sectors heavily reliant on venture capital and private equity. However, the impact on individual companies will depend on their specific positioning and financial health. Companies with strong fundamentals and a focus on mid-market growth may see less negative impact or even benefit from the situation. Overall, the market is likely to become more cautious and discerning, favoring risk-averse strategies and focusing on value over hype.

Disclaimer: This analysis is based on the information provided in the news article and should not be considered as financial advice. Always consult with a qualified financial advisor before making any investment decisions.

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