•India is the world’s 3rd largest automotive market, only behind China and the USA, with Passenger Vehicles (PVs) domestic sales of ~4 mn units and exports of ~0.7 mn units in FY24. The total production output across segments was ~29 mn units in the same year.
•The industry plays a pivotal role in the nation’s economic landscape, contributes 6% to India’s GDP.
•This industry serves as a significant driver of employment generating employment to nearly 32 mn people in India.
Trends Shaping the Automotive Industry in India
•The rising disposable income of a growing middle class, combined with a market that has a low automotive penetration rate is driving demand for premium and feature rich automotive models in both 2 Wheelers (2W) and 4 Wheelers (4W) segment.
•India’s strategic initiatives including the longstanding “Make in India” campaign and other supporting policy initiatives such as Automotive Mission Plan 2026 and the National Electric Mobility Mission Plan 2030 to enhance its manufacturing capabilities.
•Favorable government policies and initiatives such as Product Linked Incentive (PLI) scheme launched in 2020 across 14 industries and with a total outlay of $~34 bn which provide benefits including subsidies and tax rebates to incentivize companies to invest in EV production.
•India’s expanding position as the Global R&D Hub is a key facilitator of advancement in automotive technologies and auto components manufacturing.
Automotives: Growth & Segmentation
•The automotive industry is expected to clock 4.5-6.5% CAGR between FY24 to FY29 period to reach 5.2-5.7 mn domestic vehicle sales.
•In tandem with the expansion of the automotive market, the auto component segment is expected to grow from $70 bn in FY23 to $200 bn by FY26. About $30 bn (~15%) of this is expected to be generated from exports.
•India had 26 cars per 1,000 people as of FY24. a significantly lower penetration than developed nations and even emerging nations like Brazil (214), Russia (389), and Mexico (358). This provides significant headroom for growth, given the expected increase in disposable incomes, faster economic growth, younger population, and increased focus from international OEMs.
Market Segmentation
•The automotive sector is split into four segments i.e., 2W, 3W, Passenger Vehicles (PV) and Commercial Vehicles (CV), each having few market leaders.
•In FY23, 2Ws and PVs held a market share of 75.4% and 17.7%, respectively. India is the largest 2W market in the world, given their low ticket size compared to PVs, however there is a clear rise observed in market share of PVs in the post covid recovery of automotive sales.
•Within PV segment. there is a clear shift in consumer preferences observed with increasing preference for Utility Vehicles over Hatchbacks and Sedans which is attracting international OEMs to bring more premium models to the Indian market
•Furthermore, a premiumization trend is observed through consumer demand for vehicles with Enhanced Safety Features (Anti Braking systems, ADAS), Connected devices, Cutting edge Infotainment Systems, Sunroofs and Aesthetic interiors
Electric Vehicles: Current Landscape
•The Electric Vehicle (EV) market in India is expected to grow at a CAGR of 49% between 2022-2030 presenting a massive investment opportunity of over $ ~200 bn over the next 8-10 years.
•Factors driving electrification in India:
•Government Subsidy (e.g., FAME $ ~320 mn (FY24), Production Linked Incentives – $ ~6 bn for automotive industry)
•Awareness of Environmental Issues
•Expansion of Charging Infrastructure
•Availability of EVs at Competitive Prices
•Disruptor brands are currently dominating market share in both E2W (Ola & Ather) and E-PV (Tata Motors & Morris Garage).
•EV adoption in India is being led by E2Ws owing to strong supply, compact designs, limited range anxiety, smaller and lighter batteries and lower initial price difference. Premium E2Ws (priced ex-showroom >INR100,000/$1,250) had a penetration of ~75% in H1FY24.
•With the projected decline in E2W prices (led by drop in battery price), consumers are likely to see a higher number of options across price ranges, driving greater adoption in the lower price bracket as well.
•India’s current ratio of charging stations to cars is approximately 1 charging station per 135 EVs which is significantly lower than the global ratio of 1 charging station per 6 to 20 EVs.
•Furthermore, the charging infrastructure is unevenly distributed creating a significant discrepancy between the current number of EVs and the charging stations. For example, the state of Uttar Pradesh has 0.45 mn EVs, but 406 charging stations — only 1 station for every 1,103 EVs.
•To meet the government’s aim to have 30% of new private vehicles as EVs by FY30, India will need a total of 3.9 mn public and semi public charging stations for a ratio of 1 station per 20 vehicles.
•The under development of charging infrastructure is a key deterrent to EV adoption as drivers experience range anxiety while using EVs for long distance journeys or long hours of use in case of ride share and last mile delivery service players.
•While private sector players such as Tata Power, Jio–BP Charge Zone, Exicom, Finland’s Fortnum (Glida) are making significant investments in developing the infrastructure to achieve the desired ratio of stations, innovative models like battery swapping and smart charging will also improve affordability and convenience for EV owners.
Sources: SMEV, VAHAN, EV Auto, Reuters, YourStory, Bolt.Earth, Note: 1. Financial Year in India is from March to April.
Electric Vehicles: The Road Ahead
•While EVs have emerged as the leading alternative powertrain to Internal Combustion Engine (ICE) vehicles, the overall EV penetration rate (~4.4%) in India is still quite low compared to China (~40%) and the USA (~12.5%).
•In India, OEMs are adopting a multi powertrain approach by introducing new models across ICE, EV, Hybrid (Combination of ICE and EV) and Compressed Natural Gas (CNG).
•Hybrid cars popularized by OEMs such as Toyota, Honda and Maruti Suzuki are becoming a popular alternative to EVs as they solve for two main deterrents to EVs – range anxiety and limited charging infrastructure.
Case for Hybrid Vehicles: A combination of EV and ICE
•In India, Hybrids are being seen as a stepping stone to new technology bringing down apprehensions about transitioning to a full EV.
•Their reliability (no range anxiety, no faulty battery concerns), affordability (in comparison to EVs) and lesser maintenance costs (in comparison to ICE vehicles) are making them favorites amongst both OEMs and customers.
•Hybrids are seen as a viable option, in addition to EVs to support India’s COP26 goals for reduction of carbon footprint because:
•They reduce CO2 emissions by at least 30% and increase energy efficiency up to 44% in comparison to ICE Vehicles.
•Given limitations in development of charging infrastructure, shift to Hybrids from ICE will be critical in reducing emissions
•As of FY24, EVs and Hybrids have a similar market penetration in India. However globally there has been a downward trend in EV sales, while Hybrid demand is picking up. Automotive players are becoming increasingly bullish on Hybrids
•BYD, the largest global EV player currently has also increased its guidance for Hybrid sales.
•Maruti, India’s largest OEM, expects 25% of PV sales to be from Hybrids by 2030
•Toyota plans to convert most, and eventually all of its Toyota and Lexus line up to hybrid only models for its US market.
Battery Swapping : Solution for EV Charging & Battery life Concerns?
•Even though the total lifecycle cost of EVs is lower than ICE vehicles, they have a high upfront cost.
•Large proportion (35-40%) of the upfront cost is attributed to the Battery Pack. China’s Nio has successfully demonstrated that battery swapping can solve for these challenges through following strategies:
•Bring down the cost of owning EVs by offering a subscription based Battery-as-a-service (BaaS) model.
•Reduce risk of owning a faulty battery as the batteries are regularly inspected and maintained by the company.
•Users get to upgrade to the latest generation of technology without worrying about end of life hassles.
Sources: HBS, Redseeder Research, CRISIL MI&A, Economic Times, Fortune India, Note: 1. Financial Year in India is from March to April. FY24 YTD refers to Apr 2023 – Feb 2024 period.
M&A Trends and Recent Deals
M&A Activity Drivers
•In FY23, the manufacturing sector had one of the highest growth rates in M&A activity amid general market suppression, with a rise in M&A deal value in the sector by 33% and deal volume increase of 22% compared to previous year.
•The automotive sector has been a magnet for foreign direct investment (FDI), with a cumulative equity FDI inflow of about $35 bn between April 2000 and September 2023.
•There’s a noticeable interest in eco-friendly solutions and technological advancements, particularly within EV and Mobility as a Service sub-sectors.
•Emerging interest areas such as Auto Tech and Auto components indicate new opportunities for technological enhancements and market expansion.
•In Q2 2024, Domestic consolidations continued to lead M&A volumes with a 60% share while inbound activity continued to lead the values contributing to 65% of overall M&A values.
Conclusion
The automotive industry is currently being disrupted by several alternative fuel technologies – right from EV, Hybrid, Ethanol and Green Hydrogen based fuels. However, with India’s rapidly growing economy, the industry is expected to boom, irrespective of the powertrain technology, as an increase in per capita income translates to a higher vehicle penetration. In tandem, India’s strong position in both automotives and auto components, will give further impetus to companies manufacturing in and selling to India.
Opportunities exist for global companies to invest in India by providing technological expertise or by leveraging India’s manufacturing capabilities to outsource production of high quality cost competitive products. Some emerging areas of interest are battery cell manufacturing and management systems, charging infrastructure, electrical and electronics systems, infotainment systems and emission control devices.
CFI Group is pleased to present the Specialty Chemicals Valuation Snapshot for the first semester 2024. This report provides commentary and analysis on current market trends and M&A activity within the Specialty Chemicals sector.
Spotlight
•Europe remains a key region but is grappling with weak global demand and low capacity utilization. Gradual improvement is evident with EU chemical production showing steady growth since August 2023, climbing 2.4%-4.3% year-on-year (YoY) in early 2024. Though volumes are still below pre-pandemic levels, the decline of energy prices and increased demand from China signal hope for the European chemical sector’s mid-term performance. As a trading partner, however, India seems to grow in importance. Though a bit on the sideline from a pan-European perspective, the new free trade agreement established between the European Free Trade Association (EFTA) and India could be an important steppingstone for further co-operation.
•In India, the chemical sector continues to demonstrate resilience, with projected growth of 7.0%-8.0% for 2023-2024, surpassing broader economic growth forecasts. India’s recovery is underpinned by robust domestic demand, particularly after emerging from COVID-19 lockdowns. Expansionary trends in output and new orders, alongside new production capacities coming online, are set to support growth. However, market volatility, fluctuating global trade flows, and unstable upstream pricing remain concerning.
•Despite a sluggish start to M&A activity in early 2024, momentum is building. Deal volumes showed a modest recovery from the 10-year historical lows seen in 2023. Although challenges such as high borrowing costs and geopolitical tensions continue to suppress deal-making, there are clear signs of potential growth. A significant shift is expected in the second half of 2024 as central banks begin to lower interest rates, potentially unlocking more opportunities especially for financial investors. Private equity houses, still disposing of significant “dry powder”, are positioned to play an increasingly prominent role in sector consolidation. The demand for specialized products, innovation, and sustainable solutions offers promising opportunities, especially in the high-demand specialty chemicals market. As economic conditions improve and decreasing interest rates, we expect heightened competition among private equity and strategic acquirers, who have held back due to market uncertainty.
•In conclusion, despite the turbulence of recent years, the specialty chemicals sector is well-positioned for a rebound. The long-term outlook remains positive, with strategic M&A moves expected to yield significant returns. The current downturn appears to be temporary, and it is increasingly clear that the sector’s recovery is not a question of “if” but “when.“
Global Trading Multiples
After a substantial decline in valuation multiples in 2023, particularly in the first half of the year, both TEV/Revenue and TEV/EBITDA multiples showed an improvement in Q2/24. Median TEV/Revenue increased by +29% YoY, while TEV/EBITDA rose by +9.3% YoY.
The Commodity Chemicals sector saw the most notable rebound in TEV/Revenue multiples, rising from 0.9x to 1.3x (+53.4% YoY). In contrast, the Construction Chemicals sector experienced a decline in TEV/Revenue multiples (-6.3% YoY).
TEV/EBITDA multiples generally increased across sectors, but the overall picture is mixed. Agrochemicals showed a substantial jump from 3.8x to 7.8x, more than doubling its previous multiple, though from a historically low level. Basic Petrochemicals, Cosmetics Chemicals, and Paints & Coatings diverged from the trend, posting reduced multiples.
Pharmaceuticals continue to maintain the highest valuation multiples, despite previous declines. While TEV/Revenue multiples show a slight increase, expectations point to a slow rise in valuations throughout 2024. However, the potential impact of large reserves held by pharmaceutical buyers may suggest a downcycle1.
Basic Petrochemicals saw a slight decrease in its TEV/EBITDA multiple (YoY -2.7%) but an increase in its TEV/Revenue multiple (YoY +6.1%) compared to Q2/23. This suggests improving profitability after a challenging economic environment, as destocking, particularly in China2, comes to an end and demand cautiously picks up, signaling a mild recovery for the sector.
Similarly, Cosmetic Chemicals and Paints & Coatings reported declines in TEV/EBITDA multiples (-9.6% and -11.4% YoY, respectively), while their TEV/Revenue multiples slightly increased. This mirrors the trend in Basic Petrochemicals, indicating stronger profitability and suggesting modest improvements in general market conditions, not (yet) fully reflected in the M&A and stock market.
In contrast, Construction Chemicals exhibited a significant rise in TEV/EBITDA multiples (YoY +21.4%) alongside lower TEV/Revenue multiples (YoY -6.3%), bucking the trend observed in Basic Petrochemicals, Cosmetics Chemicals, and Paints & Coatings. This divergence is reinforced by the unfavorable market outlook for the construction sector in the near future3 which seems to have started in Europe, but now is spreading globally.
Looking ahead, the chemicals sector is poised for a complex landscape towards the rest of 2024. The rebound in valuation multiples for Commodity Chemicals and Agrochemicals suggests a positive trend, signaling potential growth and increased profitability. Basic Petrochemicals, Cosmetics Chemicals, and Paints & Coatings are likely to continue their gradual recovery, driven by improving market conditions and ending destocking cycles – a trend that seems to bypass the construction sector and therefore construction chemicals.
Global Transactions and Multiples
The median EV/EBITDA multiples in the Basic Chemicals sector have risen in H1/24, although transaction volumes have not returned to the peak levels observed in H1/22. Since H1/20, transaction numbers have surged by 404.5%, from the all-time low, driven by the pandemic. However, with fewer transactions disclosing their multiples in H1/24 compared to prior periods, the data has become more volatile, resulting in considerable fluctuations in multiples over recent periods.
The sharp increase in the median EV/EBITDA multiple in H1/24—more than doubling compared to H2/23—suggests a potential shift toward higher-quality assets, as fewer but more strategically significant transactions have been completed. With interest rates coming down again, larger-scale financing could become more attractive, fueling deal activity. However, chemical companies continue to face challenges as customer preferences increasingly prioritize decarbonization, adversely affecting profitability.
The sector remains characterized by fluctuating transaction volumes and shifting market dynamics. As companies focus on sustainability and cost efficiency, the trend towards acquiring strategically valuable assets is likely to persist in the near future.
The M&A landscape in the Specialty Chemicals sector has experienced a slight decline in transaction numbers, accompanied by an increase in multiples compared to H2/23. This trend is partly fueled by private equity showing stronger interest4.
The Argos Index®, which tracks mid-market transactions involving financial buyers, indicates a modest recovery in multiples5. Still, the overall trend remains downward from the record-highs in 2022. Strangely, financial investors currently seem to be paying higher multiples than strategic buyers — underscoring the increasing interest of private equity in the sector and the amount of “dry powder” available.
Data from the Specialty Chemicals sector also is distorted by limited disclosure of multiples. The mid-market experiences pronounced polarization in paid multiples, with transactions concentrated at either the higher or lower ends of the spectrum. This divergence reflects a widening valuation gap, as high-quality deals command premium prices.
Looking ahead to H2/24, private equity’s growing presence may continue to shape the M&A environment and support transaction numbers as well as multiples paid.
Global Deal Volume
Global Deal Activity – Overview
•In the global landscape of M&A activities within the specialty and basic chemicals sectors, notable trends emerge across different regions.
•In the Specialty Chemicals sector, Europe stands out with the highest number of deals, showcasing strong market consolidation and strategic acquisitions. The U.S. follows with a significant yet more measured level of activity, reflecting a stable interest in the sector. Asia, though participating at a more conservative level, shows notable contributions from countries like China, India and Japan, highlighting these markets’ growing importance in the specialty chemicals space.
•In the Basic Chemicals sector, Europe again leads the way with the most transactions, reinforcing its position as a hub for chemical industry mergers and acquisitions. While the U.S. shows significant activity, it is slightly less vigorous compared to Europe. Asia, with contributions from China, India and Japan, shows a more moderate level of activity in this sector, indicating steady engagement in the global chemicals industry.
•These trends reflect Europe’s leadership in chemical sector M&A, with the U.S. closely following, while Asian markets continue to gain momentum in both specialty and basic chemicals sectors, signaling their increasing significance in the global chemicals market.
CFI Group is pleased to present the Specialty Chemicals Global H2 2023 (Jul-Dec) Review. This report provides commentary and analysis on current market trends and M&A activity within the Specialty Chemicals sector.
• As compared to 2022, there was a significant decline in 2023 global equity market valuation in the specialty chemicals industry. It was due to a substantially weaker demand from end-use industries, de-stocking after the unclogging of the supply chains, high energy cost, intensifying recessionary effects combined with rising interest rates, and inflation. The higher cost of borrowing, which was a roadblock to deal-making in 2023, could ease amid an anticipated rewind in monetary policies. While economic drivers and market outlooks vary across the chemical industry, we see specific industry sectors with high consolidation potential — namely construction chemicals and CASE (coatings, adhesives, sealants, elastomers).
• Multiples paid in transactions also show a negative tendency with multiples dropping towards and below the 10-year historical values. Despite these effects, the number of transactions remains high in H2 2023, suggesting a sustained necessity for portfolio evaluation and strategic transactions.
• The Asia-Pacific region (APAC) again proved to be a key growth driver, though not as much as expected during the start of the year and with shifts within the region. APAC is expected to continue to hold two-thirds of the chemical market in 2024.
• Despite the hurdles faced in the global chemical market, Indian chemical companies are poised for a promising resurgence in margins. The anticipated recovery, set to materialize from the second half of FY24 will be due to a strong domestic demand and increased global interest in sourcing from India. The growing prominence of specialty chemicals and niche applications, coupled with robust capital investments by Indian chemical firms, underpins this positive trajectory. Lastly, the ‘China Plus One’ strategies employed by major customers fuel this development.
• The Global Chemical Industry is entering 2024 with a positive outlook. Despite the challenges in the past two years, the chemical industry is set to rebound with moderate growth in 2024. While challenges remain, the combined effect of rising demand and industry focus on sustainability, decarbonization, digitalization, and innovation is creating a strong foundation for growth and success in the years ahead.
• Acquirers that held back in 2023 due to uncertainty may be ready to execute in 2024. The stock market is recovering, driving up public market valuations of selling companies, and leading to more common ground in deals. With a mix of potential tailwinds and headwinds, 2024 appears poised for a cautious return to stronger dealmaking activity and higher valuations again.
• While large-scale mergers may remain elusive, increased mid-market transactions, sector-specific consolidation, and innovative deal structures will most likely define the year.
Global Trading Multiples
In 2023, specialty chemicals sector valuations fell, yet global valuation multiples rose due to a sharper decline in company profitability relative to market valuations.
The Industrial Gases sector had the most notable increase in TEV/Revenue multiples, going from 2.0x to 2.4x, whereas Pharmaceuticals and Specialty Intermediaries & others experienced a decline. Similarly, TEV/EBITDA multiples also generally increased, with Petrochemicals more than doubling its multiple from 7.0x to 15.2x, highlighting a significant jump; Cosmetics Chemicals and Pharmaceuticals bucked this trend with reduced multiples.
In terms of TEV/Revenue multiple, Industrial Gases have seen the highest increase within the last year. In 2023, the sector overcame supply chain obstacles that it had experienced in 2022. In 2023, it could position itself for future growth.
Despite high TEV/Revenue valuations in Pharmaceuticals, the sector experienced a 12.2% decline, possibly due to high-profile drug failures, and market access shifts, but still remaining on an above average level.
Due to an increase in revenues coupled with a decrease in profitability, Specialty Intermediates & others saw a decrease in terms of TEV/Revenue while simultaneously experiencing a notable increase in TEV/EBITDA multiples.
Basic Petrochemicals increased its TEV/EBITDA multiple more than 108% compared to 2022 Q4. This significant rise was not due to an increase in enterprise values, which remained steady, but rather a notable decrease in EBITDA from its all-time highs in the post-COVID raw materials price rally. Consequently, Steady enterprise value with shrinking EBITDA resulted in doubling the multiple.
Rising demand expectations for electric vehicles and renewable energy solutions are fueling growth prospects for the Commodity Chemicals sector well into 2024.Reflecting this optimism, the TEV/EBITDA multiple for Commodity Chemicals in 2023 almost doubled.
Cosmetic Chemicals have experienced a moderate decline in its TEV/EBITDA multiple. This can be attributed to the sector specific M&A environment in which strategic buyers are more dominant, looking for synergies and purely financial investors are more selective.
Global Transactions and Multiples
The global median EV/EBITDA multiple for transactions in the Basic Chemicals sector continues to trend negatively from the all-time high in 2021.
The decrease in multiples and slight decrease in transactions can be attributed to several factors. Geopolitical tension in Europe and the Middle East but also regulatory changes influence both metrics.
Even though deal activity has slightly decreased YoY, it is expected that it will increase again in 2024. The general sentiment is that the peak in interest rates has been overcome, making financing on a larger scale available again.
Chemical companies face notable pressure as customer preferences increasingly emphasize decarbonization and sustainability. Simultaneously, these companies must meet the demand for high performance and cost-effectiveness. Balancing these priorities requires strategic agility and innovation.
Overall, the M&A environment in the Basic Chemicals sector has witnessed better times. Similar to H1 2023, the industry is still facing headwinds but with more hope for 2024.
The global Specialty Chemicals’ M&A environment has witnessed an increase in transactions but a decrease in multiples for H2 2023. Part of the decrease is attributable to a statistical effect, as the number is based on a relatively small sample of transactions with published data.
The Argos Index®, which tracks transactions involving private equity, confirms the overall negative trend, exhibiting a continuous decline since 2021, with a slight recovery in 2022 before descending again to 9.0x EBITDA in 2023.
Overall, financial investors, especially private equity firms, have been and are getting more involved in the Specialty Chemicals sector. Even though there has been quite a bit of deal flow in the sector, there still are major opportunities. Private equity firms are expected to influence the M&A environment significantly in the coming years.
Similar to Basic Chemicals, the industry continues to encounter challenges, yet there is increased optimism for 2024.
As the year draws to a close, we reflect on the transformative developments strengthening the bonds between India and Switzerland. This year marked a milestone with the signing of the India-EFTA Trade and Economic Partnership Agreement (TEPA), which is set to redefine economic collaboration between India and Switzerland. TEPA stands as the first Free Trade Agreement with a commitment to targeted investments and job creation, promising to deliver $100 billion in FDI and 1 million jobs in India over the next 15 years. This transformative agreement promises to enhance bilateral trade, streamline market access, and unlock investment opportunities for businesses in both countries.
Europe’s FDI in India has reached USD 107 billion between FY 2000 and FY 2023, with Switzerland emerging as one of India’s key trade partners. Key sectors driving this trade include chemicals, precision machinery, and pharmaceuticals. Switzerland’s strong economic ties with India reflect their strategic collaboration and the growing demand for Swiss products, which underscore their quality and relevance in the Indian market.
One of TEPA’s key features is its extensive tariff concessions, covering 99.6% of India’s exports under 92.2% of EFTA’s tariff lines. Indian exporters gain 100% access to non-agricultural products, along with concessions on processed agricultural goods, while Swiss exporters benefit from reduced tariffs on 95% of industrial exports to India.
TEPA also establishes Switzerland as a strategic base for Indian businesses to access EU markets, given that 40% of Swiss exports are EU-bound. With 128 Swiss sub-sectors covered, the agreement encourages sectoral collaboration in key industries such as chemicals, pharmaceuticals, and precision machinery. Switzerland’s robust trade ties with India are underscored by its position as India’s largest European import partner, accounting for $21.24 billion in imports during FY23-24. While Chemical sector supports India’s exports and engineering products dominate India’s imports, reinforcing a mutually beneficial trade dynamic. This partnership not only highlights the quality and importance of Swiss products in Indian markets but also underscores India’s rising influence as a global trade hub.
Currently, over 300 Swiss corporations operate in India, and TEPA’s provisions are set to encourage not only more large companies but also SMEs to tap into India’s rapidly growing market, projected to grow by 6-9% annually. In a nutshell, TEPA is poised to catalyse economic synergy, fostering innovation, investment, and sustainable growth for both nations. With its far-reaching implications, this agreement strengthens India and Switzerland’s commitment to building a future of shared prosperity. We look forward to seeing the continued success of this economic partnership.
India is deeply committed to its transition away from traditional fossil fuels and building its non fossil fuel capacity to at least 500 GW by 2030. The country’s cumulative renewable energy capacity totals to 209.4 GW as of December 2024, with solar energy contributing 47% of the capacity, followed by wind energy (23%) & Large hydro Projects (22%), and the rest being generated through Bio Power (5%) and Small hydro projects (3%).
The rapid expansion of renewable energy capacity will drive higher penetration of renewables into the power grid, which may lead to grid stability challenges. At 20% penetration, grid stability becomes more difficult to maintain, while at 30%, instability becomes a significant concern. Coupled with the intermittent generation patterns of solar and wind energy, this poses a critical challenge for the Indian government in achieving its 2070 net-zero emissions target.
Energy storage systems (ESS) play a crucial role in smoothening out this intermittency and enabling a continuous supply of energy when needed. Thus, for sustainable renewable energy growth, a concurrent growth of ESS capacity is imperative. In line with this, the recent statement by Mr. Prashant Singh, Secretary of the Ministry of New and Renewable Energy, indicates that the government may mandate 10% battery storage for new renewable energy projects, which is expected to further accelerate growth in the ESS sector.
Energy Storage Systems
Energy Storage Systems (ESS) are designed to store surplus energy generated from renewable sources, which can be deployed during periods of peak demand. ESS are crucial for stabilizing the grid by reducing fluctuations in renewable energy generation. They store energy for use during peak demand, support grid stability, and enable greater renewable energy integration. ESS also help reduce peak energy costs, lower carbon emissions, defer infrastructure investments, and enable energy trading, contributing to a more efficient and sustainable energy system.
Battery-based Energy Storage Systems (BESS) and Pumped Hydro Storage (PHS) are the most widely used and commercially viable storage solutions. While other technologies exist, BESS and PHS dominate the market and are expected to complement each other, each playing a key role in supporting renewable energy growth and enhancing grid stability.
Growth Potential
The Ministry of New and Renewable Energy (MNRE) has prescribed state wise Renewable Purchase Obligations (RPOs) which mandate specified percentage of electricity to be sourced from Renewable Energy sources for Distribution Companies (DISCOMs). Similarly, Energy Storage Obligations (ESO) have been prescribed to secure grid stability, as the share of RE goes up.
Cost Analysis and Financing Parameters
Future trends and Investment Opportunity
Contingent consideration, often referred to as earnouts, is a strategic component frequently utilized in merger and acquisition (M&A) transactions. It is a financial arrangement wherein a portion of the purchase price is contingent upon the achievement of specific future performance metrics by the acquired company. In the dynamic landscape of business acquisitions, contingent consideration acts as a flexible financial arrangement that links future payments to the performance of the acquired company.
Reasons Behind the Use of Earnouts:
Risk Mitigation: Earnouts are commonly employed when there is uncertainty regarding the future performance of the acquired company. Sellers might opt for earnouts to share the risk with the buyer and ensure that the full purchase price is commensurate with the actual performance achieved.
Valuation Misalignment: In cases where the buyer and seller have differing opinions on the current value of the target company, contingent consideration allows both parties to compromise by tying a portion of the payment to future performance.
Alignment of Interests: Earnouts align the interests of the buyer and seller, as both parties have a vested interest in the success of the acquired business post-transaction. Sellers remain involved in the company’s performance, aiming to maximize the contingent payments.
Characterizing Contingent Considerations:
While contingent consideration arrangements are often used to achieve similar purposes and exhibit certain common characteristics, contingent consideration structures observed in practice come in many different forms that are designed to address the unique risks associated with each specific transaction. An earnout may be broadly characterized by the choice of the underlying metric or event which triggers the payment, the structure or payoff of the earnout, and the means by which the earnout is ultimately settled.
1-Underlying Metrics:
Underlying metrics refer to a measurement unit defined in the contingent consideration agreement, the value of which will determine the amount of the contingent consideration to be paid.
Typical Metrics Include:
Financial metrics: Revenue (in some cases in conjunction with minimum gross margin conditions), EBITDA, net income, and business metrics such as number of units sold, rental occupancy rates, etc.
Non-financial milestone events: regulatory approvals, resolution of legal disputes, execution of certain commercial contracts or retention of customers, closing of a future transaction, achievement of technical milestones (such as completion of a product launch, a stage of product development, certain software integration tasks, or a construction project), etc.
The choice of the underlying metric will affect the riskiness of the contingent consideration payoff cash flow and therefore the relevant discount rate. For example, the risk associated with certain nonfinancial milestone events (such as an earnout contingent on regulatory approval of a pharmaceutical drug) might typically not be influenced by movements in the markets and therefore such risks are diversifiable, leading to the use of a discount rate similar to the cost of debt of the obligor over the appropriate time horizon. In contrast, the risk associated with a financial metric will generally not be fully diversifiable, leading to the use of a discount rate that includes a risk premium for that financial metric’s exposure to systematic risk.
2-Payoff Structures
At one extreme, contingent consideration may be structured in a simple way as a fixed percentage of an underlying metric such as earnings or revenue (i.e., a linear payoff structure). At the other extreme, contingent consideration payoff structures may be complex, nonlinear functions of the underlying metric, including minimum thresholds below which no payment is made, a maximum payment cap, tiers with differing rates of payment per unit of improved performance, and/or carry-forward provisions that link payment in one time period to performance in other time periods.
The contingent consideration structure can have a substantial impact on the risk, degree of leverage, and discount rate to use in the valuation. Furthermore, similar to the distinction between diversifiable and non-diversifiable risk, the distinction between linear and nonlinear payoff structures is a key consideration when selecting the contingent consideration valuation methodology.
Examples of Payoff Structure:
While most earnouts are settled in cash, there are cases where settlement involves the transfer of other assets, equity, and/or liabilities. The way an earnout is settled may or may not have an impact on its fair value.
If the earnout payment is specified in monetary terms but settled through the transfer of other assets. Such an earnout is economically equivalent to an earnout settled in cash.
Eg: An earnout payment equal to 500 worth of the acquirer’s common shares if EBITDA earned in the first year exceeds 5,000.
However, specifying an earnout as a fixed number of the acquirer’s shares will impact the fair value of the earnout, and the valuation of such an earnout generally requires consideration of the fair value of the shares being transferred, the impact on the counterparty credit risk and the correlation between the value of the shares and the underlying metric.
Eg: An earnout payment equal to 500 common shares of the acquirer if EBITDA earned in the first year exceeds 5,000.
Valuation Methodologies
At the acquisition date, IND AS 103 – Business Combinations requires an acquiring company to report the contingent consideration at fair value as part of the purchase price in an M&A transaction. The three generally accepted valuation approaches to estimate the value of an asset or liability include the income approach, the market approach and the cost approach. Given that the income approach incorporates future expectations, it is typically the approach used to value contingent consideration. Within the income approach, there are two commonly used methods to value contingent consideration.
1.The scenario-based method (“SBM”)
The scenario-based method requires the identification of a set of outcomes (or scenarios) for the underlying metric or event and the payoffs associated with each outcome. The payoffs are then probability-weighted according to an assessment of the likelihood of each scenario. The probability-weighted payoffs are then discounted at the appropriate rate to calculate the expected present value of the contingent consideration.
2. The option pricing method (“OPM”)
Option-pricing models are mathematical tools used to estimate the value of options – financial contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific period. The three most widely used option-pricing models for valuing contingent consideration are the Black-Scholes-Merton model, the binomial option pricing model, and the Monte Carlo simulation.
Selecting a Valuation Methodology
The SBM is appropriate for pricing contingent consideration when the risk of the underlying metric is largely diversifiable and there is linear payoff structure. In the case of a metric with only diversifiable risk, estimating, the SBM discount rate need to only address the time value of money (risk free rate) over the relevant time horizon and any counterparty credit risk.
In the case of a linear payoff structure, the structure does not change the risk of the underlying metric. In this case the discount rate must incorporate the required metric risk premium as well as the time value of money over the relevant time horizon and any counterparty credit risk.
In the case of a nonlinear payoff structure (for example, a structure with tiers, thresholds, caps, or path dependencies such as carry-forwards, roll-backs or cumulative targets) involving a contingent consideration metric with non-diversifiable risk, estimating the discount rate for the SBM cannot be easily intuited by the valuation specialist as the SBM discount rate must be adjusted for the risk of that nonlinear payoff structure. In such cases OPM methodology is appropriate for valuing contingent consideration. In such cases the OPM provides a framework by which the impact of the payoff structure on the non-diversifiable risk of the metric can be easily modelled.
Conclusion:
Earnouts can be challenging to structure, value, and account for. However, when the two parties are far apart on value, they can be a handy tool to bridge the gap. By aligning the interests of buyers and sellers and addressing uncertainties in post-acquisition performance, earnouts contribute to the success of strategic deals. As the landscape of M&A continues to evolve, contingent consideration is likely to remain a significant component in structuring deals and fostering collaboration between acquiring and selling entities. Understanding the characterizations and valuation methodologies associated with contingent considerations is crucial for both parties to navigate these complex financial arrangements successfully.
India has embarked on a transformative journey towards renewable energy, with a particular focus on solar power. As one of the fastest-growing economies globally, India faces significant energy demands. To address these while tackling environmental concerns, the country has placed renewable energy at the forefront of its agenda. In 2023, India held the third position globally in solar power generation, making a significant 5.9% contribution to the sector’s global growth
India’s renewable power capacity is set to double from 2022 to 2027, with solar PV accounting for three-quarters of the growth, considering the target of achieving net zero by 2050.
Key Policy and Regulatory Reforms aiding the Renewable Energy potential in India
Among renewable sources, solar energy stands out as a pivotal component of India’s energy transition strategy. The country’s solar sector has experienced exponential growth, driven by favorable policies, technological advancements, and increasing investment. India’s abundant sunlight makes it particularly conducive to solar power generation.
Solar Module Manufacturing
• Module Manufacturing capacity to grow 2.1 times by FY29 aided by PLI Scheme and Backward integration through production of Polysilicon, Wafers and Cells.
• China plus one to benefit Indian Solar Module Manufacturers due to rising demand from the US, EU, Africa and the Middle East.
• Indian Solar module exporters have seen a significant surge attributed primarily to the restrictions imposed by certain countries on Chinese Imports, thereby creating a supply gap and a notable opportunity for Indian players.
M&A Trends
• India accounted for 20% of Asia’s Renewable Energy M&A deal value in 2022 and 2023.
• The Energy sector saw a steep rise of 63% in deal value in 2023, being driven by large deals.
• Driven by India’s target of clean energy capacity of 500 GW by 2030, the solar energy sector has seen a 30-fold increase in M&A activity from 2014- 2023.
• Past trends and Government push for clean energy likely to drive M&A Activity upwards in 2024-25
Conclusion
India’s renewable energy and solar sectors are pivotal in the country’s quest for energy security, economic growth, and environmental sustainability. With ambitious targets and supportive policies, India continues to lead the global renewable energy transition, positioning itself as a key player in the solar energy landscape.
In the dynamic world of finance and investment, the integration of Environmental, Social, and Governance (ESG) factors into business valuation has become a paramount consideration. As the global business community grapples with the requirements of sustainability and responsible corporate practices, investors are increasingly recognizing the need to go beyond traditional financial metrics. This article explores the multifaceted realm of ESG, delving into its significance, the process of integrating these factors into business valuation, challenges encountered in this endeavour and the highlights of Business Responsibility and Sustainability Reporting (“BRSR”) Core which has been introduced recently.
Understanding ESG & Its Importance
ESG encompasses a triad of critical factors that collectively shape a company’s approach to sustainability, ethical practices, and corporate governance. Environmental criteria evaluate a company’s impact on the planet, social criteria gauge its relationships with stakeholders, and governance criteria assess the internal structures guiding decision-making. The importance of ESG lies in its ability to provide a holistic view of a company, reflecting its commitment to long-term resilience, ethical conduct, and positive societal impact. Investors are increasingly recognizing that companies with robust ESG practices are not only better equipped to manage risks but are also likely to be more resilient in the face of evolving market dynamics.
Source: FTSE Russel
Integration of ESG into Valuation
The integration of ESG factors into business valuation marks a paradigm shift in how companies are assessed for investment. Traditional valuation methods are being augmented with ESG considerations, as investors seek a more comprehensive understanding of a company’s performance and its ability to create long-term value. ESG integration involves analyzing a company’s ESG practices and assigning a quantitative value to these intangible factors. Below are ways to incorporate the ESG impact under the market and income approach:
The Market Approach:
To account for ESG considerations, valuation under the market approach should:
Identify and assess ESG practices for comparable companies and industries, then
Assess the performance of the subject company for such criteria, and
Calibrate the market inputs to the subject entity to take into account the relevant performance as compared to the comparable companies.
An example for adjusting the ESG factor under market approach is as follows:
A significant limitation of this method is that ESG data, disclosures, and rating systems are currently in their early stages of development, particularly for entities that are often private companies. Consequently, the scoring process is subjective, as different practitioners may assign varying weightings or scores to distinct ESG factors and practices implemented by companies.
The Income Approach:
To account for ESG considerations, valuation under the income approach should consider its impact on the discount rate or cash flows itself.
While discount rate adjustments can be used to incorporate ESG into the Discounted Cashflow approach (DCF), adjusting the discount rate may lead to double counting if beta values have reflected the market’s perspectives on ESG risks. A better way of integrating ESG factors in the DCF can be to adjust future cash flows. This helps the investor to integrate the company’s ESG factors into future cash flows and thus to focus on the relevant material issues. Depending on different industries and company performances, the translation of ESG factors to cash flow adjustments varies. Hence industry to industry lens is very critical since there is no standardized benchmark in ESG integration and adopting industry and company specific value drivers could help avoid the ambiguity of the cash flow adjustments. Some of the adjustments to be considered include:
The “E” factor can be incorporated by adjusting the cashflows with additional costs and Capex investments in carbon reduction initiatives and costs savings from adoption of energy/water saving technology.
The “S” factor can be incorporated through adjusting costs related to employee training programs, hiring contractual employees on a permanent basis, workplace safety measures and research and development investments to ensure quality and safe products among others.
The “G” factor can be incorporated through adjusting for fines or penalties imposed by regulatory authorities due to weak governance policies of companies.
An example for adjusting the ESG factor under income approach is as follows:
Issues in Integrating ESG Factors in Valuation
While the integration of ESG factors into business valuation is gaining momentum, it is not without its challenges. One key issue is the lack of standardized metrics and reporting frameworks, making it difficult for investors to compare ESG performance across companies. Additionally, there are concerns about “greenwashing,” where companies may overstate their ESG credentials to appear more attractive to investors. Striking a balance between qualitative and quantitative assessment poses another challenge, as some ESG factors are inherently subjective and context-dependent. Overcoming these challenges requires the development of standardized reporting practices, increased transparency, and ongoing dialogue between investors and companies.
BRSR Core Framework
Recent developments in the ESG landscape include the introduction of the BRSR Core Framework by SEBI, an extension of the existing BRSR framework which delves deeper into ESG integration by providing specific requirements for reporting and assurance. This framework aims to enhance transparency and accountability for companies and further elevate the role of ESG in business valuation.
Key Features of BRSR Core:
Specificity: The framework defines a specific set of ESG indicators that companies must report on, – covering environmental, social, and governance aspects. This specificity ensures consistency and comparability across companies, facilitating easier analysis and assessment for investors.
Assurance: BRSR Core introduces mandatory assurance requirements for a subset of reported ESG information. This independent verification enhances the credibility and reliability of ESG data, reducing the risk of greenwashing and building investor confidence.
Value Chain Focus: The framework extends beyond a company’s own operations to include its value chain, requiring reporting on the sustainability practices of its suppliers and partners. This broader scope provides a more comprehensive picture of a company’s overall impact and promotes responsible sourcing practices.
Phased Implementation: BRSR Core’s implementation is phased, starting with the top 1000 listed entities by market capitalization. This gradual approach allows companies to adapt and implement the framework while minimizing disruption.
Impact on Business Valuation:
Enhanced Data for Valuation Models: The BRSR Core’s specific and assured ESG data provides valuable input for valuation models, enabling a more comprehensive assessment of a company’s long-term value and risk profile.
Better Risk Assessment: Deeper insights into a company’s ESG performance through the value chain helps identify potential environmental, social, and governance risks that could impact financial performance.
Improved Comparability: The standardized reporting and assurance requirements facilitate easier comparison of ESG performance across companies, enabling investors to make more informed investment decisions based on ESG considerations.
BRSR Core represents a significant step towards a more integrated and transparent ESG landscape. The BRSR Core framework is still evolving, and its impact on business valuation is likely to grow as companies adapt and investors refine their assessment methods. Ongoing collaboration between regulators, investors, companies, and valuation professionals is crucial to ensure the effectiveness and continued improvement of the framework. Addressing data availability and accessibility, particularly for smaller companies, remains a challenge that needs to be tackled to ensure fair and equitable application of the framework.
Conclusion
In conclusion, the integration of ESG factors into business valuation is a transformative trend that reflects the evolving priorities of investors and the broader business ecosystem. ESG considerations are no longer peripheral but integral to evaluating a company’s overall performance and potential for sustained success. While challenges persist, the ongoing evolution of reporting frameworks like BRSR signals a commitment to addressing these issues and advancing the integration of ESG into mainstream financial practices. As businesses navigate this new landscape, embracing ESG not only contributes to a more sustainable future but also positions companies as leaders in an era where responsible practices are synonymous with long-term value creation.
COVID-19 has resulted in a paradigm shift in the way business will be conducted going forward. We believe there will be incremental focus on improving hygiene and sanitation not only at the work place but also at airports, entertainment zones, restaurants, etc. In addition, businesses will have to create standard operating procedures (SOPs) and necessary infrastructure to build consumer confidence and increase footfalls, once the economy opens up. Facility Management, as a sector, is at the forefront of this and likely to be one of the key beneficiaries.
Having said that, the businesses operating in this sector will have to initiate new measures to adapt to this new ‘normal’. One of the foremost developments will be adoption of technology and reduction of people’s touch. This will not only improve efficiency but also reduce dependence on manual labor. Besides, companies will have to invest in training and skill development to ensure smooth transition and technology adaptation. Although, the Company will have to incur initial capex but the return on investment (RoI) is expected to be incrementally better in the medium to long-run.
We further believe smaller companies with limited capital may not be able to compete with larger players in this new normal, which might result in M&A / consolidation.
The process of globalisation was already in retreat-it is being referred as ‘slowbalisation’. With this pandemic, vulnerability that global economic interdependence creates on supply chain has been recognised. The Governments have already started to give incentives to push local manufacturing and job creation to kick-start the revival of their economies. On the other hand, companies will be looking at countries like India to move their low cost base.
In the post COVID19 era, countries will reconfigure their economies to look at the perils and pitfalls of overdependence on cheap import. We believe production of intermediates to some extent, final goods to a large extent and essentials completely will move back to their region but production of basic and intermediate goods to a large extent will remain in low cost countries.
The result will be increased investments in ‘consumer’ economies by local and global companies. This in our view will lead to spurt in increase in M&A/investment in consumer economies and low cost countries (ex China) by MNCs. Are you ready for the post Covid19 era???
Globally, India is the 6th largest producer of chemicals and contributes 3.4% to the global chemicals industry. In terms of size, the Indian Chemicals industry is valued at ~$165bn and expected to grow at a CAGR of ~9% for next 5-7 years.
China, one of the largest manufacturers of chemicals globally, is struggling with pollution related issues which has resulted in shutdown of factories across the country. This coupled with rising manufacturing cost has created a vacuum and opened a window of opportunity for India.
To draw a parallel with the chemicals industry, India lost a massive opportunity, primarily to Bangladesh and Vietnam, for manufacturing ready-made garments (RMG) for global consumption. This can be attributed to lack of supportive policies and measures by the Government of India as well as inability of the stakeholders to capitalize and capture this billion dollar market. RMG has revolutionized and is the major driving force behind Bangladesh’s economy. To put numbers in perspective, RMG accounted for 10% of Bangladesh’s total GDP in 2004-05 and currently accounts for more than 15% of the total GDP. In addition, RMG exports currently contributes ~80% to the Country’s total exports.
We believe the Chemicals industry is at a similar inflection point and knocking on the doors of India.
In our opinion, the Chemicals industry in India is favorably positioned to seize this multi-billion dollar opportunity and needs to focus on the following important pillars:
1. Invest in human capital and skill development
2. Innovate and focus on R&D to gain competitive advantage
3. Upgrade technology to achieve efficiencies and control cost of manufacturing. Also, environmental compliance is critical to avoid a China-like situation
4. Consolidate to achieve economies of scale. Risk of stagnancy or going out of business will be higher with status quo
5. Regulate:
a. Government of India will have to create multiple Petroleum, Chemicals and Petrochemicals Investment Region (PCPIRs), similar to Dahej PCPIR, to leverage benefits of common resources and support services resulting in better cost economics.
b. Secondly, India will have to build robust infrastructure to support domestic and international movement of goods.
c. Lastly and more importantly, the Government of India will have to introduce investor friendly policies and environment to attract FDI in the Chemicals sector.
Is India ready? Will we grab this opportunity or miss the bus?
The lockdown has created a forced WFH for most of us from sectors where it has never happened before. Folks from service industry like IT, where WFH is part of organizational DNA, will agree that it’s a habit that many others will develop in time. Other service sectors and support functions should look up to best practices followed by them.
The question then arises – Would this disrupt the workplace and accelerate the transition to WFH? Would corporates make WFH a new normal as they are already looking for cost cutting avenues? Would people have homes with dedicated workspace?
We are now realizing how effectively we can work with various collaboration tools and video conferencing. Travel time, especially in the metros is saved drastically, traffic situation is improved, carbon footprint is reduced and work-life balance gets better. Naturally, there is a flip side to it like lack of face-to-face interaction/mentoring, team bonding, etc. One needs to strike a balance as per their work demands.
In the post COVID-19 era, WFH would probably not feel as difficult as it does today when the rest of the world is functional as before.
The coronavirus has curtailed the movements of people across the globe… Borders have already been shut down to stop its further diffusion… Trade and investment has come to a halt… Virtual meetings has become the new norm…
In the post COVID19 era, firstly, the host countries will likely make the visa norms stricter for persons traveling from the most affected countries. Besides thermal scanners, it is likely that there may be other medicals checkups at the airports. Secondly, individuals themselves will be apprehensive in taking up international travel. The biggest fear being quarantined because of airport checkups. Thirdly, the business travel will require a higher compelling threshold to make physical travel than was earlier because most are (forcibly) finding out that we can hold meetings virtually as well.
All this would also require global companies to have their base/represntative locally for swiftly grabbing business opportunities. On the other hand the unquantifiable damage of all this being reduced personal interaction and cultural exchange between countries.
In the aftermath of COVID-19, companies around the world are likely to transform strategies around sourcing and production of intermediates and final goods. There will be incremental ‘domestic’ production and sourcing of intermediates and final goods to limit the extent of disruption and promote local economies; although the possibility of a complete shift looks practically difficult. This will further allow companies to return to normalcy after a similar disruption in future in a relatively quicker time frame. Thus, it is likely to reduce cross-border trade.
The result will be new / incremental investments in ‘consumer’ economies by both local and global companies. This in our view will lead to spurt in increase in M&As / JVs / investments in consumer-driven economies by global MNCs.
Manufacturing expertise have been built over decades involving technology, expertise, resource utilisation and scale. For example: Mobiles in China, Apparels in south Asia and so on.
In the post COVID 19 Era, countries will want to encourage local manufacturing in order to boost their own economies. There already are calls on social media for buying locally, holiday locally, etc. Same thing may happen to support local production.
While simple items may get manufactured locally in short term, manufacturing involving complex technologies may not move out of their current clusters in the near future. Governments will come out with incentives for this to move to consumer countries. For this to be localized in medium term, technology, expertise and capital will have to be transferred from their current hubs to the local regions. This in our view will present several opportunities for cross border investments, Mergers & Acquisitions, Joint Ventures and collaborations.
COVID19 is about to rewrite the fundamental principles of Globalisation. The cumulative impact is so huge that another Post COVID19 Era will be added in the future books of Economics. The world is going to change and many of those changes would be irreversible.
With the world entering a new era, will Globalisation as we have known operate under new rules??? Will manufacturing be Localised??? Will movement of people may be limited??? Will sourcing be reshaped??? Will cross-border investment increase???
Keep watching this space for our views on how the world is going to change…