Moelis & Company, which started its India operations in 2012, works with a team of 14 bankers headed by veteran investment banker Manisha Girotra . Prior to Moelis, Ms. Girotra was the chief executive of Swiss bank UBS’s India operations. Moelis, which advised several high profile deals like the sale of Japyee’s cement assets to Aditya Birla Group, is upbeat on the opportunities to resolve stressed assets in India and wants to play an active role in the sector.
The Centre has recently amended the Banking Regulation Act that gives more power to the RBI in resolving stressed assets. Does this present an opportunity for you?
I believe the part of the NPA problem will be resolved with economic growth reviving. Growth should be robust in the next two-three years which will resolve the NPA problem. Having said that some of them will need restructure, some of them may need a change in ownership. There is a political will to see our banks healthy again.
There is a strong opportunity for Moelis in the restructuring space. We had participated in some of the deals like selling of Jaypee’s cement asset to Aditya Birla. We were also involved in the restructuring of Essar’s coal assets in the U.S., to name a few. I see more such opportunities for us. Restructuring is a large part of Meolis’ global business. I think the opportunity exists here too because of the stressed situation in banks.
It is heartening to see that there is a political will. The whole joint lender’s forum could not come to a consensus because there were multiple players — what was really needed was someone to drive it. So I am very positive on what has happened. With the Act amended, we are hopeful to see all of this debt recast implemented properly and we expect in the 12-18 months lot of these problems unwinding.
Many private equity funds were awaiting regulator’s clarity for participating in the stressed asset sector. Will the change in Act help?
The conversations are all alive with the banks. The new ordinance will help. You will see a lot of private equity funds coming into India to acquire stressed companies in the next 12-18 months.
RBI has recently revised the norms for prompt corrective action (PCA) and imposed restrictions on some banks. Do you see this is a prelude to consolidation among public sector banks?
I don’t know, but I hope they are. I think in the state-owned bank’s space there is a lot of scope for consolidation. The larger banks which are better capitalised, have better market access and should be able to merge with the smaller banks. There should be fewer banks but stronger banks. Whichever sector it is, if there are fewer players with deep pockets, they dominate and the sector does very well. We have seen it in the telecom sector. I really hope to see consolidation among public sector banks in the next 2-3 years as the sector needs to consolidate.
But bigger banks are also facing asset quality headwinds…
The financial sector is getting a lot of flows from the public market. At the moment, state-owned banks aren’t getting the share of these capital flows. As it is able to walk through some of the NPA problems, we will see funds flowing into these banks again.
So then they can raise funds through FPO, QIP etc., and get capitalised. So it is a bit of a two-pronged strategy… as you see some of the NPA problems get resolved, the market will have confidence on them, and then they can get capital and then drive growth and consolidation.
The merger of public sector banks is a political hot potato. Do you think the government will push consolidation?
The government is really serious about the business, they are serious about solving the NPA problem. We have seen the political will they have demonstrated in the last 18 months…it is unprecedented…I have not seen anything like this in my career. So they want to strengthen their banks. So, I hope the next step will be consolidation among state-owned banks.
How do you see mergers and acquisition activity panning out in the banking and financial sector?
The sector will remain active, there is a lot of capital coming into the sector. Rather than bank-to-bank, there is a lot of consolidation activity in bank to NBFC, bank to MFI which provide you certain geography, certain product … and I think you will see more of those happening. Also, a lot of capital is chasing the fintech players. The whole demonetisation exercise and drive to digitisation gave these companies a huge push. That space also realises that there is merit in scale. So, you will see consolidation for the reason of scale. I think the fintech sector will remain active in the 12-18 months with regard to consolidation.
Last year we have seen healthy M&A deals. How do you see the demonetisation exercise impacting such deals?
Demonetisation has no consequence on M&A activity. Last year we had $60 billion of M&A. A refreshing trend that I have seen is that a lot of domestic M&As are happening… earlier you have not seen Indian entrepreneur selling to an Indian entrepreneur or an Indian entrepreneur paying a higher multiple for an Indian company. There is always this build versus buy argument.
But today, they are willing to pay the multiple. In my career, M&As were always inbound or outbound. This is the first time I am seeing domestic M&A outnumbering inbound plus outbound. Out of the $60 billion of M&A last year, $30 billion would be domestic, $20 billion was inbound and $10 billion would be outbound.
Do you see this trend continuing?
Domestic consolidation will remain an important theme because people are realising India is too big a country and to play in this country you need to have a scale. The scale provides you cost reduction opportunities, market access etc. Also, there are some companies where the second generation does not want to involve in business. So they are happy to monetise, earlier this never used to happen!
The other trend we are seeing is that the private equity players have actually been able to monetise stake. They are not only exiting through IPOs but they have been able to sell companies. That is a very important trend because they are able to demonstrate that if they are able to put capital in India, they are also able to exit capital out of India.
