Tuesday, October 23, 2007

Review of PE / VC ecosystem in India

Here’s a great article and a review of PE / VC ecosystem in India... Nice read.

[ Hat Tip : Alok Mittal, VentureWoods ]


1 comment:

labarik said...

Hello Krishna, please let me share an article I found. Truly deserves your attention. thanks

The Indian PE Market: Ground Realities and Best Practices

Research conducted by Evalueserve, the global research and analytics firm, forecasts robust growth for the Indian economy, and consequently tremendous opportunities for PE firms as they invest in growing companies over the next few years. However, the firm’s analysis cautions that investors be mindful of certain ground realities in the Indian market.

First, the rapid growth witnessed in the Indian economy of late, particularly between July 2003 and June 2007, may be overheating the economy. Therefore, PE firms need to be careful about investing in certain sectors. For example, in sectors, such as IT and ITES, telecom services, and high-end construction services, there is shortage of skilled workers and/or state-of-the-art equipment. As a result, input cost inflation (especially wage inflation) and employee attrition have emerged as major concerns for these sectors.

Another area of concern is real estate. As commercial and residential property prices have increased in many Indian cities recently, there is a lot of new construction activity. Last year, bank lending for commercial and residential property rose 75% and 35%, respectively. However, since salaries have not kept pace with the increase in property prices, the real estate bubble in these cities can burst, leaving some investors with substantial losses and debt.

Furthermore, the current price/earnings ratio for the Sensex and the BSE-100 is close to 21, which is significantly higher than the corresponding ratio of 12 for similar indices in other emerging countries. Even though the companies on the Sensex, the BSE-100, and the BSE-500 are growing rapidly, much of this growth seems to be speculative and fueled by foreign institutional investors (FIIs), especially foreign mutual funds. India is heavily dependent on short-term FIIs (which have bought equities and other securities) rather than on the longer-term FDIs. During the last four years, there has been more than USD 40 billion of FII investment in the country compared to USD 23 billion of FDI investment. Clearly, such rapid influx of money has driven the Indian stock market to dizzying heights, but according to Evalueserve, a quick flight of this money (FIIs) out of India would adversely impact the Indian economy by depreciating the Indian Rupee by around 25% and depressing the Indian stock market by around 40%.

In the wake of such risks, Evalueserve lists certain best practices that PE investors can adhere to while investing in India. First, so far the largest firms in India have attracted the attention of PE investors. However, there are numerous “diamonds in the rough” that have great potential. Clearly, finding such companies and doing due diligence on them is more challenging in India as compared to that in the US or European markets. This is because there is very little market research available here; moreover, these companies and even the corresponding sub-sectors may not be very transparent.

Diversification is another key to success in the Indian market. Private equity firms have traditionally been attracted to high-tech industries. However, these industries are likely to contribute only 10% to the overall growth of the Indian economy. Therefore, PE firms need to look for new sub-sectors emerging in the Indian economy, such as retail, travel and hospitality (e.g., airlines, hotels, theme parks), healthcare (including medical tourism, alternative medicinal centers and spas, hospitals, pharmacies, and laboratories), entertainment (including the Indian movie and TV industries), and private education.

Overall, investors need to research the Indian market thoroughly before investing here, because an approach such as “if it has worked in the US or China, it will work in India too” may not necessarily work.