The Indian Economy Blog

October 25, 2006

The Corus Deal and FDI flows

Filed under: Basic Questions,Business — Reuben Abraham @ 3:31 pm

We haven’t really commented on the TATA-Corus deal, partly because the news media was saturated with coverage and there’s nothing really to add. Suffice to say that from a strategic standpoint, it makes perfect sense given Tata’s ability to produce low-cost steel. I’d say both sides got a good deal with Corus shareholders getting a fair premium, while Tata lands itself a company in good shape and with a global marketshare, at a reasonable price. However, keep in mind that Tata Steel was fundamentally a debt-free company that has now taken on a huge amount of debt, which may or may not make sense in the long-term. We’ll just have to wait and watch.

I think hidden in all the media hype though is an interesting statistic vis-a-vis FDI flows. For long, Indians have obsessed about the amount of inbound FDI, especially when compared to China (India has received less in FDI inflows since 1991 than China will receive this year alone). Interestingly enough, if the Tata-Corus deal and the Videocon takeover of Daewoo Electronics does go through, India’s FDI outflows will, for the first time, exceed FDI inflows. Effectively, the projections for 2006 are that India will receive $9 billion in inflows while outflows stand at $19 billion, spread across 100+ deals, turning India into a net exporter of capital (to be precise though, a lot of the external acquisitions are not funded by domestic capital, but from foreign sources). At the very least, the investment bankers among you, especially those working on outbound M&A deals, can expect a big, fat bonus this year :)

PS: To put things in perspective, the U.S.’s outbound flows were at $250 billion in 2004.

22 Comments »

  1. Nice post. For the past few years, India has been looking abroad and lots of great buys have happened from Indian industries (I still remember a decade back, when pessimists thought that opening up of Indian economy will lead to the opposite result – all Indian companies being bought out by maruding foreigners!!). Tatas themselves have led the pack (with the acquiring of Tyco, Tetley, Daewoo’s Truck business and now Corus), like how they did in the last century – whether it be starting a premier institution – IISc & TIFR or starting aviation industry, steel production, Motors, Sofware services/Outsourcing (TCS)…

    It seems the phenomenon is spreading throughout, whether it is Pharma, Software/ITeS, Steel, Electronics, Beverages/FMCG… Even public sector companies like IOC and ONGC are refreshingly aggressive in this business. In the future, I would like to see mammoth companies like Indian Railways, SBI (and other group of Indian banks are much healthier than most Asian banks), BSNL, Power Corporations to be removed off their Shackles and enter the world economy in a big way.

    We have just started as a trickle and it doesnt take a long time to become a flood, as all the individual droplets are getting bigger and their distance is getting smaller. I hope the Indian govt doesnt do any stupid things, as often as they do in the past, and be a silent pusher of Indian companies into the global arena. The last thing we would like to see is an India getting back to its dark dungeon of pre-1991 black age, and killing off its golden roosters by socialism.

    Comment by Balaji Viswanathan — October 26, 2006 @ 1:09 am

  2. does this indicate that investment opportunities are better outside india or is it just indian companies trying to get a better foothold abroad?

    Comment by krishna cherukuri — October 26, 2006 @ 6:40 am

  3. Yes, the media has been saturated with the coverage on the deal. Ofcourse the final shape of the deal will take time (counter bids, shareholders seeing the logic of the board/ deal, rating agencies having their say on the debt which is a rather significant part of the deal). But I hope this will not kick off a ‘me-too’ phase where others try to replicate the overarching leit-motif of internationalisation/ M&A which the tata’s may be able to carry off. However do others have the patience to do the homework, and also make an honest assessment of what they are good and more important what they are not good at ?
    If not investors are bound to lose money

    What this deal does indicate is that with the trade barriers having been lowered, though not eliminated, most businesses have to align/ benchmark themselves against global practices. National beliefs, markets and boundaries have a role in shaping corporate strategy. But there are other forces as well – customers, technology, investors ! For many of the people in these the national borders, increasingly just mean additional/ specific documentation to be undertaken

    For the tata’s this would mean that they would have about 50% of their revenues come from international customers/ operations. For a group which is as diversified and integrated into India as Tata, this is a significant change in their perceptions of business opportunities. Being a global company, does have advantages, but also different benchmarks and expectations. The next 5 years would show whether they have been able to graduate from an Indian Group to a Global group, keeping their core-values intact !

    But it is definitely interesting times ahead !

    Comment by envenkat — October 26, 2006 @ 9:28 am

  4. When India needs so much investments particularly in infrastructure sector, can India really afford to have higher FDI outflows ? Also, with most of the investments being made through leverage buyouts funded by banks overseas, it is only the risk and the corresponding return, if any, will get transferred to Indian companies. The actual outflows will be far less than the size of the deals.

    I would not be totally surprised if some of these acquisitions are funded by the industrialists/companies through the money stashed abroad over the years and now legitimising that

    Comment by G Mohan — October 26, 2006 @ 9:35 am

  5. [...] Interesting point. Indian Economy blog comments on the recent TATA Corus deal. [...]

    Pingback by DesiPundit » Archives » TATA CORUS Deal — October 26, 2006 @ 10:05 am

  6. …into a net exporter of capital (to be precise though, a lot of the external acquisitions are not funded by domestic capital, but from foreign sources).

    When you know it is false, why spreading it ??

    Besides, capital also flows in other forms than FDI – FII, invisibles, etc.
    An ignorant post

    Comment by harman — October 26, 2006 @ 2:02 pm

  7. I don’t think that by moving from a debt-free corporation towards a leveraged one is necessarily a problem – this is more in tune with international companies, whereas Indian companies have been, for historic reasons, less leveraged than others.

    Also, a large portion of this deal will be funded through capital raised outside of India primarily because given the current strictures that Indian capital markets operate within, despite Indian banks being highly capitalised, funding approx £3bn of debt was never going to be possible from Mumbai alone.

    Not too sure whether the deal is going to be as hunky-dory as you predict – Corus is the larger of the two companies, and business integration will be critical to success. There isn’t much geographical overlap in markets, but trying to build an international business model that can successfully deliver the financials needed to make the deal dynamics work will be challenging.

    Final point – outflows exceeding FDI inflows isn’t too surprising, given that most GDP growth in the country is driven through domestic demand. India has excess capacity within retail, and until that is saturated, we will continue to see strong growth, regardless of what FDI we see in that year.

    Comment by The Buddha Smiled — October 26, 2006 @ 2:14 pm

  8. The Tata-Corus deal- well I also am quite proud of it (and blogged about it briefly. However, your observation on positive net FDI from India is debatable since a large part of the fund raising is happening overseas through sub-investment grade borrowing.

    Comment by The One — October 27, 2006 @ 8:52 am

  9. Private Equity inflows into India are also counted today as FDI, though they have many shades of FII inthem. The point of outbound capital, is an important one.
    a) it is happening in significant quantities to make a difference to the contours of the economy. If the current proportions are sustained for a decade or so – GNP could be much different from GDP !
    b) The sectors where it is happening is also interesting – initially it was largely Oil/ ONGC led (ONGC has invested close to USD 8 bn, and it also has a JV with Mittal). Then in 2005 it was largely led by Banking/(SBI primarily to shore up its Asian/ Egyptian presence – close to USD 2 bn). Now we are seeing Industrial and more so Private sector investing from India (as opposed to the deal size which would include overseas mobilisation) of close to USD 5 bn. This indicates the changing complexion
    c) Initially the outbound capital was to secure orders (The export-credit guarantee corporation of India is now the worlds 5th largest export credit guarantee agency)or build factories/ facilities overseas. Now it is becoming oriented towards also acquiring management control. Or the capital markets of India and international markets will become more and more integrated. Another indicator of this phenomenon is Cairn Energy plc, a UK listed independant Energy company, is hoping to mobilise USD 1.5- 2 bn from Indian capital markets to invest USD 2- 3 bn in its indian operations !

    Or this deal indicates a step towards globalisation of indian capital markets

    Comment by envenkat — October 27, 2006 @ 10:42 am

  10. WSJ had an article on Tata’s acquisition spree (and another one contrasting Ratan’s subdued style of take over and management vs Mittal’s flamboyant Arcelor purchase). Tata’s # 2, R. Gopalakrishnan, claims the acquisitions are for learning about global biz rather than about teaching Indian management style to others.

    In the past Tata funded acquisitions (and cleaned up its companies balance sheets) using cash flows from TCS (a large cash cow). I wonder what portion of this acquisition will be paid for by TCS.

    The talk of inflow vs outflow of FDI is really irrelevant (beyound economic stats). Each company should decide what it thinks is right to growing its business. Inflows are low because we make it difficult compared to ultra free-trade Chinese (although that seems to be changing under Hu Jintao) and outflows are higher because it makes business sense (and there is lot pent up demand for expertise/technology and markets).

    Comment by Chandra — October 28, 2006 @ 11:41 am

  11. OK… Maybe my BoP theory/knowledge is slipping or something, but I have a simple question for economic statisticians/experts….

    Back in May-June of this year, when Indian markets were tanking, the talk was about a rising CA deficit (which by def. includes remittances) was too dependent on low FDI, fickle FPI, and stagnating NRI deposit inflows. I don’t want to re-ignite that debate or anything (at least not just while on the Corus topic). But can someone help me understand how outward FDI -due to the Corus deal- shows up on India’s BoP? And what does it, in theory, do to overall BoP financing needs?

    If the money is entirely raised overseas, then does it just show up in the stk of pvt debt and heighten ST debt service ratios (w/the onus on Tata?) Or is there a different treatment in the country’s net international investment position — due to the fixed assets acquired overseas?

    Thanks.

    Aninda

    Comment by Aninda — October 30, 2006 @ 10:34 am

  12. As far as I know a majority of the funding is being routed offshore, and the Indian leg is only about USD 2.5 bn which is invested into Tata Steel Singapore. To make this USD 2.5 bn fundng Tata Steel India, may take some debt, maybe USD 1bn, on its books (source unknown- hence impact on BoP unclear). or the debt-profile of India wouldnot go up materially because of this. The Corus assets, would belong to Tata Steel UK, which is 100% owned by Tata Steel Singapore, and which is a subsidiary of Tata Steel India. So the net asset position on India’s books would not happen, other than to the extent of increased holdings in Tata Steel Singapore

    Vis-a-vis May 2006- Outbound FDI, the net FDI accretion to India would be lower than otherwise anticipated. However with the >20% growth in exports and cooling of crude-prices, I dont think this would materially change the picture. The Forex reserve position has remained at USD 160 bn+ level in the last 6 months. Or there seems to be compensating factors working. Last year the CA deficit did raise a concern on where the liquidity would come, and if it is foreign the interest rate/ forex impact of the same. However given the strong performance and the continuation of this trend, foreign lenders dont seem to have changed their stance.

    With regards to the domestic situation, we have had a year where loans have grown by > 30%, and deposits by 20%, and interest rates have moved up only by 125bps. And that too I believe those hikes were in keeping with the Fed cycle. But with the US being in a different phase and India being in a different phase, will the RBI governor do any thing different. We will know tomorrow when he announces the Credit Policy for the busy-season

    Comment by envenkat — October 30, 2006 @ 2:38 pm

  13. I was under the impression that net positive FDI is what a deficit ridden economy like USA’s survives on. Is FDI so critical for an economy that is growing at the rate of 8+% a year? Economists, please advise.

    Comment by Sarat — October 31, 2006 @ 5:27 am

  14. A lot of the debt that the Tatas have taken on is debt borrowed from banks and funding agencies outside India. Further, the debt would also be backed by Corus assets. Net net, even if the price may be a bit high, it is a good sign and almost all the stuff I have read says that Tata had to acquire to be able to grow and hold its own.

    Comment by Ashish — October 31, 2006 @ 9:30 pm

  15. There are basic questions which need to be answered.

    1. Would it be better to invest the money in India then buying a company outside. The clear answer is Yes. India has probably one of the best cost strcutures and investing the money in India will generate the best ROI.

    2. How does the “close to market” logic holds for commodity company. The commodities are always driven by price and not close to the market principle. Lets understand that Tata Steel is not going to become close to the market by acquiring Corus since its always the total landed price which will determine your market share.

    3. What is it that Tata Steel or India gets from this deal. Will there be more employment, more economic activities, higher taxes to Indian government, What? I can’t figure out. Its clear submission to the design of foreign powers that we are squandering our hard earned money to revive sick British companies.

    Comment by Emgee — November 1, 2006 @ 12:20 pm

  16. One of the factors omitted in India’s FDI measurements is the role of the NRIs. India gets around $20 to $25b worth of remittances every year and much more than all of the FDI combined. Given the high interest rates in India (even banks give in the range of 8-9%) compared with the 2 to 5% for secured deposits in US, a healthy rupee forecast (combined with a weak dollar forecast) and northbound economic growth of Indian immigrants, it is a no-brainer that India could receive atleast a $10b more from this year, if Indian companies play right and Indian govt. keeps quiet.

    So, India doesnt need to bother too much about having a lot of dollars being exported outside. If it makes Indian companies healthier and powerful, a lot of we NRIs could slosh the dollars, as it is the best investment option for many of us.

    Comment by Balaji Viswanathan — November 2, 2006 @ 12:27 am

  17. Sarat, US deficit is funded by US treasury purchases by foreign governments – major ones being Chinese, Japanese, and increasingly oil rich Russia and gulf countries. Net FDI, while I am not sure if it’s positive or not at the moment, would, I think, be quite small compared to US deficit.

    Comment by Chandra — November 4, 2006 @ 10:06 am

  18. Here is McKinsey Quarterly interview with Ratan Tata regarding the deal:

    http://www.mckinseyquarterly.com/article_page.aspx?ar=1688&L2=21&L3=114&srid=27&gp=0

    Need registration.

    Comment by Chandra — November 10, 2006 @ 12:13 am

  19. I think FDI is a right step for investing in India rather than spending outside. India has got huge potential and investing in her infrastructure would be highly profitable.
    The Tata Corus deal should not be given a negative aspect as pumping of dollars into foriegn market will not hamper country’s growth.

    Comment by desidirectory.com — November 10, 2006 @ 2:27 pm

  20. The FDI outflow surpassing the inflow is a general trend in any economy which plans to consolidate its assets outside of its boundaries.The fact that India is emerging as on of the finance exporters falling back on debt is a good sign as it is always better to generate fast moving income rather than stagnant income in the form of FD’s and savings.One example of the success story is the case of USA where the debt margins far surpass the countries Net GDP.This fuels the growth of consumerism and indirectly the economy blooms.I am very happy and elated as an Indian that Tata has won the corus deal despite bidding at an all out takeover cost of 608 pence per share which is highly overpriced though.

    Comment by Varun Varghese — January 31, 2007 @ 10:00 am

  21. The one time outflow will give us inflow in terms of profit over the years, that is what precisely developed countries are doing

    Comment by Deepak kabra — February 1, 2007 @ 5:39 pm

  22. Interesting for Indian Companies. TATA Corus deal will be funded by whom . Guess the Cash Cow of TATA.

    Comment by STALLMAN — March 10, 2007 @ 12:55 am

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