India’s booming stock market has a downside — it is making mergers and acquisitions expensive as valuations stay elevated, according to BNP Paribas SA. The S&P BSE Sensex and NSE Nifty 50 gauges have posted records this year, making local shares more expensive than a benchmark of developing markets. The indexes are valued at about 23 times reported profits, versus a multiple of 15.5 for the MSCI Emerging Markets Index. “The positive market scenario in India makes it challenging for private equity and M&A transactions as valuation expectations have gone up,” said Ganeshan Murugaiyan, head of BNP Paribas’s investment banking in the country. Indian companies completed deals worth $32.5 billion since Jan. 1, compared with $83.5 billion in 2016, which was the highest in at least 12 years, data compiled by Bloomberg show. A buoyant market for initial and secondary offerings will help counter what is likely to be a slow year for M&A transactions, said Murugaiyan.
Share sales from “consumer-led stories such as financial services, consumer goods and retailing will see good demand as they are a proxy for the expanding economy,” Murugaiyan said. Companies saddled with debt in the power and infrastructure sectors will “face a challenge as investors are not comfortable” with the businesses, he said. Companies raised 276 billion rupees ($4.3 billion) via initial public offerings on the S&P BSE Sensex. in the year ended March, the highest since 2010, data from the exchange show. The bourse is betting that the start of a unified sales tax from July 1 may prompt smaller companies to sell shares to the public as they become more tax-compliant and transparent.
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Domestic and foreign funds have this year poured a combined $12 billion into India’s stock market amid optimism Prime Minister Narendra Modi will deliver on his agenda to make it easier to do business in Asia’s third-largest economy. The Sensex is up 18 percent this year, the region’s best performer after South Korea’s Kospi index. “Fund flows have been good and it is more of a momentum buying than value buying in Indian equities,” Murugaiyan said.