Aisha de Sequeira: The market reader

Aisha de Sequeira, 49, is a Morgan Stanley veteran and has spent nearly half of her 25-year career at the American multinational investment bank in India; she is currently co-country head and heads its investment banking business. de Sequeira came to India in 2007. Incidentally, this was the time when her global office was representing Ford in its sale of Jaguar Land Rover to the Tatas. She faced turbulent times shortly afterwards, starting with the collapse of Lehman Brothers. But she ensured Morgan Stanley continued on its growth path.

In 2017, under her leadership, Morgan Stanley topped the M&A advisory league table in the country, thanks to the $23-billion merger between Idea Cellular and Vodafone India; last year, her firm continued to be involved in some marquee deals such as the Blackstone-Essel Propack deal, even though the entire financial system was reeling under stress from delinquent loans. She spoke to Fortune India on what is likely to happen after the ongoing storm settles down. Edited excerpts:

You came here just before the Lehman crisis and have seen the turbulent Indian market in the last decade. By 2024-25, we are going to be a $5-trillion economy—a target set by Prime Minister Narendra Modi. How do you see the road to reach there?

It, of course, is not going to be a linear path. But I think we have the building blocks in place. In terms of getting there, we have the per capita GDP [gross domestic product] number going up—it’s about $1,800 now and is expected to go up to $4,000 by the time you get to $5 trillion. We have a great demographic trend that gives high impetus for growth. As more people come into the workforce, more people are productive and have a greater spending ability. What we need clearly is to combine with that a strong financial system, strong credit, and capital to flow. I think, right now we are in the process of getting some of the systems back in line, given the funding issues around all the non-banking financial companies and public sector banks.

How long do you think this impasse will continue?

What’s likely to happen after that? Hopefully, in the next six months, some of this should start to get re - solved; it is important because we have to get credit flowing again. We have had a lot of foreign capital, private capital, and long-term capital interested in coming to India. It initially started with more consumer-driven sectors like financial services. Today a lot of money is going into some infrastructure sectors like renewables and roads. It is a good sign that the capital is going into a broader base in the economy. People see a huge potential in the tech ecosystem in India, where you have got a lot of enterprise capital and private capital coming in. So foreign capital interest in India is strong, especially long-term foreign capital interest. However, the market is going to get polarised in terms of more money going into fewer hands. It’s only those who tick a few boxes with getting capital. It is only those with scale, credibility, and track record [who] will have access to capital. And, as a result, that’s going to drive more in-market consolidation to create leaders and players of scale.

The NCLT process is already creating a certain consolidation in the market...

I am talking of outside of that process. After the Lehman crisis, the Reserve Bank of India (RBI) reduced interest rates, leading to a lot of capital investment. After that, we haven’t seen much investment going into capacity building by companies and in the past seven years, a lot of this capacity has gotten used up.

Ramping up to a $5-trillion economy could force a consolidation in the market as it will take time to build capacity. How can we identify the green shoots of this happening

People will want to capitalise on growth as it becomes apparent it is going to be there. You will have to start by having a strong capital structure that will give the ability for companies to be nimble. So in the bucket of what I talked about before—scale, credibility, and corporate governance—you should add capital structure to that. A strong capital structure will give people the ability to gear up and fund some of these acquisitions or put their own greenfield capacity. So, I think, the need for consolidation will come from a number of different avenues. A strong capital structure will be the starting point.

Ramping up to a $5-trillion economy could force a consolidation in the market as it will take time to build capacity. How can we identify the green shoots of this happening?

People will want to capitalise on growth as it becomes apparent it is going to be there. You will have to start by having a strong capital structure that will give the ability for companies to be nimble. So in the bucket of what I talked about before—scale, credibility, and corporate governance—you should add capital structure to that. A strong capital structure will give people the ability to gear up and fund some of these acquisitions or put their own greenfield capacity. So, I think, the need for consolidation will come from a number of different avenues. A strong capital structure will be the starting point.

What will be the flavour of the consolidation?

People will be willing to pay a premium valuation to become players of scale and not just support some - body because they’re going to get the deal done at a 10% discount from a valuation perspective. The interest level in opportunities is going to be driven more by long-term leaders rather than valuation differences.

You helped Blackstone buy Essel Propack. What do some of the deals tell you about the valuation trend?

I don’t want to take names of companies but Essel was a different case altogether; it was not leveraged at all. But if you take a recent case of a low-cost housing company [acquired] by a highly leveraged NBFC, the transaction was not cheap. The story with India has al - ways been that for attractive assets, you have to pay a certain price be - cause of the growth potential that comes with those assets. But what do environments like this do? They unlock assets that have not been available before. You will see people bringing assets into the market to raise capital. That’s what is going to happen in this market. You will see more assets getting unlocked.

We saw a lot of large deals during 2004-2007 when India wasn’t this big an economy. Why is it not the case now?

A lot of those were outbound acquisitions; for companies to make large outbound acquisitions, there needs to be a lot of CEO and promoter confidence that their under - lying businesses are doing well and the economy in which their under - lying businesses operate is strong. That’s what you saw between 2004 and 2007. Today, it’s more like wait-and-watch—to see what is happening globally. The second thing is: The global economy has also be - come more protectionist in terms of getting regulatory approvals. I think the majority of the deals are going to be in-house consolidation as well as partnership transactions with private equity (PE) and sovereign wealth funds basically helping companies consolidate the market. The key issues involved here are reducing complexity and capital allocation. Promoters are going to need to prioritise businesses where they want to get capital to grow be - cause it is a differentiator. And that in itself will lead to some asset sales, potentially when you don’t find capital to grow your largest business.

Indian promoters always want peak valuation and these aren’t the best of times. How will this pan out?

The deals don’t need to happen to - day. My point is there will be some valuation which will ultimately make sense for them to consider and they are not compelled to do any - thing at a stress valuation. Frankly, if you look at it, valuations have not adjusted as much and it is relatively attractive from an Indian context. The moot question remains: If you are not going to put capital behind your businesses to grow them, then the value of some of those businesses will erode. It will be a balancing act because funding growth will help you maintain valuations.

U.S. firms are doing well and seem to be engrossed in their domestic market. While PE, pension, and sovereign funds have come to India, will foreign corporate capital come soon?

It will be company-specific and firms won’t do it because it is India. We saw the Walmart deal. But trans - actions won’t come easy. When you buy a company in India, especially a listed one, which is insignificant compared to your market cap, you don’t want to take on the attendant regulatory issues. Therefore, for the right kind of transaction, there will be a lot of interest.

The fees pool in your business has tapered off since 2007. There is a general feeling that the investment banking business in India is not lucrative enough and firms like yours have had to diversify to stay in business. Has it become any better?

A lot has changed since 2007. Then you saw these big, megadeals which brought in a lot of fees and those kinds of deals were also just a few. Now, we have money coming in from diverse pools. We did the first REIT [real estate in - vestment trust] for Blackstone. We raised money for bigbasket and then for FirstCry. We are involved in the Shriram Capital deal. We did a roads deal for Sadbhav Engineer - ing. It is not just a Tata or Birla doing a big deal in a few years. Even if you look at PE buyers today, they are owners of very large assets in India, which they will ultimately need to exit. With them, you have a deals visibility pipeline in India like never before. The realisations have also increased in the past four years and the nature of the business is materially better than it was a decade ago. Promoters are willing to pay for service and they are willing to pay for outcomes.

If there is one change you would like to see in Indian regulations, what would that be?

It will be the rules to take a company private. Because people running a $40-billion company abroad buying a $2-billion firm in India would rather buy it 100%. If those are changed, there will be tonnes of interest in the country. Right now, the rules are very onerous. To take a company private, there is a tendering process and a reverse book-building process to buy back shares and there is no minority squeeze-out available. If the rules are made more representative of what happens globally, interest in India-listed companies will in - crease considerably.

This was originally published in the September 2019 issue of the magazine.