A Passage To India
Rapid economic growth and business growth opportunities draw investors.
By Kelly Holman April 21, 2008
When London's 3i Group announced the close of its 3i India Infrastructure Fund at $1.2 billion last week, the capital raise illustrated the importance India commands among institutional investors who are lured to that nation's rapidly developing economy.
The US merger market may be on uncertain footing this year amid the economic downturn and credit crunch, but the private equity deal environment in India is burgeoning, according to Boston Analytics, a corporate consulting firm that recently published a report entitled The Private Equity Landscape in India.
India saw 903 private equity investments between 2004 and 2007, accounting for $24.8 billion of deal volume. More than 45 transactions exceeded $100 million, according to the study, which found that the average size of private investments totaled $36.8 million in 2007 across 387 transactions.
Swati Chaturvedi, a vice president of private equity at Boston Analytics, says India's strong economic growth, growing middle-class population flush with disposable income and large consumer market have fanned investor interest in India. Also, he noted, there are fewer regulatory restrictions and the nation has active stock markets.
Additionally, a correction in the Bombay Stock Exchange--stocks declined 20% in the first two months of 2008--has improved investment valuations for private equity firms. Now that public company valuations are lower, there is a commensurate drop in private company valuations that likely will attract investors.
India's rapid GDP growth--projected at 8.4% in 2008 by one estimate--along with controlled inflation rate and a domestic savings rate of 32.4% make it an attractive long-term investment prospect, according to Boston Analytics. Chaturvedi's research found that of 903 private equity investments over the last four years, 28% involved companies in the information technology industry, an area that remains a draw for many investors.
Information technology and related services generated 250 deals worth $3.6 billion from 2004 through 2007, Boston Analytics found. Although the sector commanded a large number of transactions when compared with other industries--seven deals totaled more than $100 million--the average size of IT deals was only $14.7 million.
Manufacturing was the next most popular industry with investors. It accounted for 17% of all transactions, followed by banking, financial services and insurance which made up 10% of deals, as did healthcare.
Banking, financial services and insurance, which Boston Analytics collectively refers to as BFSI, had 93 deals from 2004 to 2007, or $5.1 billion of volume, and eight transactions in the sector generated more than $100 million when lumped together. The average size of deals in the BFSI group, which is expected to grow by more than 20% this year, was $55.1 million.
India's growing middle class has a greater interest in investment and financial services and this is driving interest in the banking, insurance and financial service industries, according to Chaturvedi. "It is a large, fast-growing sector with the right valuations at the moment," she says.
Retail banking alone, for instance, is expected to be a $242 billion industry in India this year, according to Boston Analytics.
Other industries that have attracted plenty of private capital include textiles and garments, which drew $749.1 million from 40 transactions from 2004 through 2007 and had an average deal size of $18.7 million. Meanwhile, telecom had 17 deals worth $3.1 billion. The average deal size for the telecom was on average $187.9 million.
Shipping and logistics are also attractive areas for investment, but remain challenged due to stringent regulations, according to Boston Analytics.
Transportation finance, meanwhile, is one industry in India that has drawn the attention of TPG Capital, which opened an office in Mumbai six years ago. The Fort Worth, Texas-based private equity firm has backed two Indian companies, Matrix Laboratories and Shriram Transport Finance.
TPG sold its 51.5% stake in Hyderabad, India-based Matrix Laboratories last year to Pittsburgh-based pharmaceutical company Mylan Laboratories.
TPG's $100 million investment in Shriram Transport two years ago gave it a 49% stake in the 29-year-old Mumbai-based company, which employs 4,000 people in more than 327 branch offices. The company provides a range of financing options for drivers who want to buy used and new trucks.
Soon after its investment in the Mumbai company, TPG shored up Shriram's board with some director and executive appointments. The governance changes bolstered the operations of the company, which has also proved a hit with India's truck drivers, often poorly educated with little access to bank accounts.
"What we bought into was a business with a $1 billion asset book and now it has grown into an asset book worth about $4 billion," says Puneet Bhatia, managing director of TPG Capital, in a telephone interview from Mumbai. "It's a very interesting business model and a company almost in the domain of micro lending," he says of Shriram Transport.
TPG, which has three dealmakers on the ground in India, is reviewing three other potential deals. It has taken a sector-agnostic and fairly broad-based approach to investing in India, according to Bhatia.
"We've actually continued to stick to our core competence in taking select large positions in companies operating in sectors that we understand well and could contribute [capital] to. We seek to create value in a portfolio company with a very strong investment thesis, rather than a momentum approach," says Bhatia.
Two other areas of interest for TPG in India are infrastructure, an area that has attracted much attention given the opportunity to improve the country's road and transportation links like the vast rail network run by Indian Railways, as well as real estate.
"In the last two years you've seen a huge increase in construction of all kinds, and there is a lot of money flowing into infrastructure," Chaturvedi says.
Boston Analytics believes infrastructure is expected to command $492 billion in capital requirements through 2012. One big player well-situated to take advantage of investment opportunities in the space is 3i Group. 3i's new fund will back infrastructure projects in India valued up to $5 billion, Michael Queen, managing partner and head of 3i's infrastructure business, said in a prepared statement.
In addition to its Mumbai office, the UK-based private equity firm has established a partnership with India's India Infrastructure Finance Corp. to invest in projects like Adani Power, a developer of power plants in India. 3i has invested $227 million in Adani Power.
As Anil Ahuja, managing director and co-head of 3i's Asian operations, noted in 3i's announcement about its new fund, "the scale of the opportunity for infrastructure investment in India is tremendous."
TPG, of course, isn't the only big name private equity investor interested in the India market. Washington's Carlyle Group has been a key player in India and New York private equity firm Warburg Pincus has been of the most active and most successful US investors in India.
Warburg, for example, invested $110 million in New Delhi electrical and power distribution equipment company Havells India last October for an 11.2% stake. Three years ago, Warburg Pincus sold a minority stake in Bharti Tele-Ventures for $560 million to Vodafone, generating a return of more than five times its investment, according to Boston Analytics.
Private equity investment in India, though, is still largely at the nascent stage, especially when it comes to exits, that is when a fund harvests its investment. The report by Boston Analytics found there were 184 exits from 2004 to 2007 with 64 that had holding periods ranging from four years or less.
According to Chaturvedi,the average size of deals in India is on the small side at $18 million, making it difficult for larger foreign investors, particularly US funds, to invest in the country. "Larger funds in the US are keen on larger deal sizes," she says.
There are exceptions though. For example, India's Sophia Power raised $395 million thanks to backing from India-based LNM India Internet Ventures and San Francisco's Farallon Capital Management.
Meanwhile, buyout and private investment in public equity (PIPE) transactions are highly regulated and are fewer in number than other sorts of equity deals such as later-stage growth equity investments, Chaturvedi says. While India's government has encouraged venture capital investment, investors have migrated towards putting capital into more mature businesses, she says.
Investors outside of India may have been busy trying to uncover investment opportunities within the nation, but some M&A advisors say Indian corporations are actually looking beyond their own borders seeking acquisitions of companies in Europe and North America. Last year, for example, Scotch distiller Whyte & Mackay was purchased for $1.2 billion by United Spirits Ltd. of India, a unit of United Breweries.
IT, or computer services and business process outsourcing types of companies, made up about 30% of India's outbound deal volume over the last nine months, says Malik Sharif, vice president, Asia, RSM EquiCo Capital Markets, an investment banking firm.
"Most Indian companies are not sellers right now," says Sharif. "They're really in a growth mode and want to know how they can get bigger."
(c) 2008 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
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Swati Chaturvedi
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