Thursday, April 24, 2008

UTI Ventures' dilemma

"Oooops... I got out! Ok. Let me re-enter..." seems to be the credo surrounding the euphoria around UTI Ventures exit from Excelsoft with 50x returns.

The report says
“Excelsoft posted a net profit of Rs 25 crore on a topline of Rs 50 crore. Sources further indicated that UTI Ventures, in addition to selling its stake to D E Shaw, has invested a further $5 million in this firm at its present valuations.”

Now that’s mysterious if not surprising. Funds exit a venture if their investments fetch valuation far in excess of their internal estimates. In that case, UTI ventures should have just sold its stake and not buy more into the same venture. But here it has done precisely that. What could be the reason?

I think UTI ventures, with the global liquidity crunch and Indian IT vendors giving out cautious guidance, could be a bit unsure of how the company’s fortunes will fluctuate going forward. US Dollar has also been declining much to the dismay of many s/w exporters. So why not lock down the premium that is on offer and still to hold a foot in the door, let’s keep some stake in. The company is operating under 50% gross margins as well.

UTI Ventures’ sell-off pips other big exits in the private equity space like ChrysCapital and Citigroup Venture Capital making 26-30 times their investment in Suzlon Energy, and Baring India selling its 34.73% stake in MphasiS BFL to EDS at about 25 times its initial investment for Rs 1,150 crore. Gaja Capital had monetized its investment in learning major Educomp Solutions by 22.5 times, while ICICI Ventures’ exit from Infoedge ( fetched it 17.5 times higher earnings.

Major players in the education space in India include Educomp Solutions, Everonn Systems and Core Projects & Technologies. The Aditya Birla Group recently picked up about a 5% stake in Core Projects & Technologies for Rs 13.5 crore. Last year, Gaja Capital Partners invested $8.25 million in education support firm Career Launcher. Mauritius-based India-focused fund Helix investments put $12 million in tutorial firm Mahesh Tutorials Educare while SAIF Partners invested $10 million in English training academy Veta.

I look at trailing 12 months P/E of some of its peers listed in Indian exchanges. Educomp solutions (99x), Everonn systems (111x) indicates a strong growth potential for Excelsoft. Why UTI Ventures had been in such a tear? Have some of their limited partners been breathing down Raja Kumar's neck? Quite likely. We haven’t heard any major exit by UTI Venture for a long time now.

1 comment:

Kapil said...

Talk about pressures of being a PE fund manager.