The corporate sector is witnessing very few deals due to the worldwide coronavirus lockdown. As mergers and acquisitions have taken a back seat, companies are finding it difficult to raise capital as it remains unclear whether private equity firms would pump in funds in this time of uncertainty.
In this edition of CNBC-TV18's Big Deal, Zia Mody, Founder and Managing Partner of AZB Partners and Renuka Ramnath, Chairperson of Indian Venture Capital and Private Equity Association (IVCA) discuss the disruptions caused to India Inc due to the lockdown and how companies would survive these difficult times.
First up, Mody said, “It [the current situation] is like an economic war, it is not just about the disease and deaths. The lockdown is impacting the global economy, which is affecting India's economy. Everybody is scrambling to see how COVID-19 would affect their businesses. Everybody is re-looking at their short term and mid term future outlook. The problem is that one cannot really predict that there is a visible end, and when that visible end is discovered, how much of the economy may still be for the broker. I think that is the fear people have about the uncertainty going ahead.”
Agreeing with Mody, Ramnath said, “When we make investments, we plan for risk, but who plans for zero revenues. This is what we are seeing in some of our companies.”
Speaking about problems the domestic retail sector is facing, Ramnath said, “We have the burden of zero revenues, we have issues with broken supply chain, we have issues with uncertainty about when we will be able to re-open businesses, we have issues with inventory which will have to be written off and above all, there are minimum wages that we have to pay. So, fixed cost burden continues on these companies with no sight of when there would be a recovery.”
Mody chipped in and said that most private equity companies are on pause as valuations may have to be revisited. “I think a lot of them [private equity firms] are concentrating on target companies they have already invested in. Cash flow, rights issues, conserving money, seeing best how to deal with the new normal for the mid term future are some of the issues that companies would want to resolve at the earliest. However, in terms of active deal making, I would say that definitely for the moment at least they have gone on the back burner,” she said.
“Once the new normal becomes a little more stable, there is visibility, because of the dry powder that is sitting with them and a lot of geared to India, everybody is hoping for a new discussion where there will be a lot of activity and the consumer once he bounces back will again become as attractive as before,” she added.
Ramnath too believes that many deals on the street may be reworked on with respect to pricing. “We are just looking at a new normal, we are looking at a new world with a new growth rate and new risks. Therefore the deals will have to be repriced. However, that should not be mistaken for lack of interest in investing.
"As far as private equity investors are concerned, we have never seen a more heightened enthusiasm to invest than what we are seeing now because fundamentally these companies are strong companies who are going through a momentary deep disruption. Therefore, having an opportunity to invest in these companies at half the valuation on interesting financing structures is an unbelievable opportunity for the industry as a whole.”