The buyer to seller ratio has gone up beyond 3x post Covid. It was less than 2x before the pandemic. This indicates it would be much easier to find buyers now as there are several new investors in this market seeking opportunistic deals now.
Deal sizes in SME space are at least 25-30% down compared to pre-Coved times and this is a good time to pick up businesses to expand offerings and add capabilities that would otherwise take years to build, said Vishal Devanath, Founder of SMERGERS, an investment banking platform for SMEs. In a chat with ET’s Faizan Haidar, Devanath talks about the impact of Covid on SMEs, factors driving the SME deal market and what the government should do to incentivise small businesses. Edited excerpts:
ET: Will the Covid-19 kickstart a cycle of consolidation in the SME sector?
Vishal Devanath (VD): PIt is possible but at the same time, it could also lead to more formal players entering the market who have better access to financial support. We are already seeing this with the number of newly registered companies on MCA touching almost 17k in June 2021 compared to 12-13k per month levels pre-Covid.
ET: What kind of funding demands are you witnessing from SMES on your platform?
VD: We are seeing a mix of all categories. While a good number want to exit the business completely, there are several players who are seeking financial partners for working capital needs to ensure the survival of business during the lockdown. Many are also seeking funds to invest in capital projects such as tech automation and plant & machinery to reduce dependence on manual labour and also expand operational capacity.
ET: A bunch of small Indian entrepreneurs are looking at exiting their business. How tough will it be to find a buyer in this market?
VD: On SMERGERS, the buyer to seller ratio has gone up beyond 3x post Covid. It was less than 2x before the pandemic. This indicates it would be much easier to find buyers now as there are several new investors in this market seeking opportunistic deals now.
ET: Are global companies looking at picking up small businesses in India?
VD: Yes, 30% of the corporate investors are from outside India especially the Middle East, the Americas and Europe. Predominantly these firms are seeking acquisitions in India to expand their market or gain access to resources here.
ET: Have you witnessed a cooling off of investor interest in Indian SMEs, given that they have been impacted the most by the pandemic?
VD: It’s actually the other way round. As mentioned earlier, buyer interest in the Indian SME space has significantly gone up, especially in industries such as healthcare, retail, hospitality, technology, etc. With the right valuation expectations, I would say it’s easier to find an acquirer in today’s market.
ET: What are some of the short and long term impacts that SMES are reporting due to the Covid-19 pandemic?
VD: Short term impact is definitely on the cash flow as SMEs which were primarily operating on a physical infrastructure had to bear the brunt of the lockdowns. While this is a big negative impact for such businesses, the long-term effect could be a positive one. Businesses are taking technology and digitisation more seriously now. Many are adopting automation and tech-driven operations and are rapidly digitising. This will be a net positive impact on SMEs, their customers and the country. We saw how demonetisation pushed the country to adopt digital payments and today it has become so easy to make payments. We will see a similar kind of revolution in how SMEs operate their business going forward.
ET: Have the government ECGLS schemes really worked for SMES?
VD: Conceptually it is great, but for SMEs, an actual reduction in interest rates and moratoriums during lockdowns could have helped better. I understand that the NPA levels are high amongst SMEs and that makes it difficult for banks to even fund SMEs, forget low interest rates. But there are several SMEs that can grow multifold with funding but get their loan applications rejected due to old and conventional methods of evaluating them. This needs to change. Industry-specific evaluation methods are needed to be able to identify and fund the right SMEs to bring down NPA levels and reduce interest rates.
ET: As a sectorial expert, what key components of a SME revival package should the government look at?
VD: Reduction in regulatory and compliance burden is the first step. As per World Bank data, businesses spend 250 hours just preparing and filing their taxes in India. That is like 32 working days a year just to file taxes! On top of this add the labour laws compliances, export-related duties, director compliances, land acquisition complexities, building permits, etc. Large companies end up hiring a team for this work, but as a small business owner can you afford this? If you spend more than half your time on this administrative work, then where do you find the time to focus on the growth of your business? Government should focus on enabling clean, transparent, and fair compliance policies which incentivise small businesses to automatically comply without having to worry about the red tape and harassment. If not, we will end up seeing an exodus of great companies shifting their registrations to other countries.
ET: Is this the right time for Indian corporates to pick up small companies in key sectors abroad at good valuation?
VD: Definitely, deal sizes are at least 25-30% down compared to earlier. This is a good time to pick up businesses to expand offerings and add capabilities that would otherwise take years to build. While technically valuation multiples may seem high due to a temporary dip in sales and profits, this is not a true indicator of valuations as these businesses will quickly get back to pre-pandemic levels once things get back to normal post vaccinations. It could potentially even shoot up considering the revenge spending which consumers may end up doing with all the excess salaries they have saved during the lockdown.