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:: 48 India

An Indispensable Guide to Equity Investment in India
48 India 10/10/2008 1:22:21 PM

Over the past several years, investors have earned massive profits in the Indian market. However, beyond the tech-heavy activity that has driven much of these profits, there are many new and interesting areas that private equity (PE) and venture capital (VC) firms are now aggressively looking to take advantage of. The Indian market is certainly unique. Therefore, investment players, who are new to India, are required to have an in-depth understanding of this market and make some behavioural adjustments in order to maximise their returns. In addition to the required capital, proper research in a challenging market, subtle and savvy managerial skills and a healthy dose of patience must also be invested to ensure success. In this article, Evalueserve’s analysis shows that those who manage the fundamentals and persevere stand to make significant gains in the years ahead. And, their impact will be felt not only in India, but also on the global economy.

Recent research conducted by the global research and analytics firm, Evalueserve, shows that if current trends continue, India is expected to receive USD 13.5 billion in PE funding during 2007, thereby becoming one of the top 7 PE investment destinations in the world. Furthermore, this funding could rise to almost USD 20 billion in 2010. Our research also shows that there are over 366 PE firms currently operating in India and another 69 have raised - or are in the process of raising - funds and are planning to start their operations soon.1 In total, these PE firms seem to have amassed USD 48 billion earmarked for investment in India between July 2007 and December 2010. Several firms that we talked to also mentioned that they would be willing to invest even more if they saw good investment opportunities. This situation stands in stark contrast to 1996, when Indian companies received only a total of USD 20 million. Indeed, if Indian companies do receive USD 20 billion in funding during 2010, this would represent a stunning 1,000-fold increase over a period of only 14 years. However, the future is hard - if not impossible - to predict because private equity investments are based on a complex combination of macroeconomic, microeconomic and financial policy-related factors that always affect the rational and emotional sentiments of the investor community. Indeed, a slow-down in the growth of the Indian economy and a tightening of liquidity around the world are only two of the many potential changes that could lead to substantially lower PE investment in India than those forecasted above.

From a demand-side perspective, assuming a real annual GDP (Gross Domestic Product) growth of 8%, an annual inflation of 5% and a constant exchange rate of 40 Indian Rupees to one US Dollar2, our analysis shows that the Indian economy will grow in nominal terms from approximately USD 1,030 billion in 2007 to approximately USD 5,040 billion in 2020. Therefore, it can easily absorb USD 60 billion between 2007 and 2010, and as much as USD 490 billion between 2007 and 2020. However, for such investment to be useful and wealth creating, it has to be invested in diverse sectors and not be limited only to Information Technology (IT) and IT Enabled Services (ITES) sectors.

This article is largely focussed on private equity investment, i.e., investments in companies already generating revenue and perhaps profit. A related article dated 21 August 21 2006, and titled, ¨DIs the Indian VC Market Getting Overheated?¡¬ can be downloaded from and another article titled, ¨DInvestments by Hedge Funds and Related Institutions in India¡¬ is scheduled to be published in December 2007.


India is neither the United States nor China
Although it is fashionable these days to compare India and China, actually the two countries are quite different. A lot of progress in China has been possible due to the government, whereas in India, it is despite the government. For example, the communist government in China can easily plan projects in a very structured and systematic manner without worrying about the courts or public opinion, whereas most projects in India get delayed because of Indian courts and a strong public opinion. Similarly, although India and the US share democracy as one of their fundamental tenets, India is a poor country with a severely underdeveloped infrastructure, whereas the US is one of the wealthiest countries with a very well-developed infrastructure. Because of these reasons, it behoves VC and PE firms to consider investing in Indian companies ¢win their own right¡ü rather than pursuing the following strategy: ¢wif it has worked in the US or China, it will work in India too.¡ü Given below are examples of three companies that are likely to cater only to countries such as India:

  • Because of the unreliable supply of electricity throughout India and the Indian government clamping down on the use of diesel generators in many large- and medium-size cities (due to immense pollution), a set of universal power supplies called "inverters" have already become quite popular and are expected to become more so during the next few years. According to Evalueserve, the market size of these inverters (and the associated batteries) is expected to grow from approximately USD 1.2 billion in 2007 to USD 3 billion in 2010. Therefore, it is quite likely that by 2010, there would be at least 2 or 3 companies with combined annual revenue of USD 1 billion and these companies are likely to have unique Intellectual Property with respect to products, processes and sales networks. Furthermore, given their unique Intellectual Property, these companies are also likely to export to other countries in Africa and South East Asia.
  • Because of poverty, low education and the tropical climate, diseases, such as Malaria and Dengue (which are spread by mosquitoes), are quite common in India (and also in parts of Africa and South East Asia). As a result, the market size of mosquito repellents in India was already USD 400 million in 2006 and is likely to grow to USD 1 billion by 2010. Again, it is quite likely that at least one company would emerge with USD 250 million or more in revenue and will begin exporting in a big way to other regions in Africa and South East Asia.
  • Castrol India produces different kinds of engine oils and lubricants in India (e.g., those for motorcycles, two-wheeler scooters, cars, trucks, tractors and pumps). The company is likely to have revenues of USD 500 million in 2007. Since the requirements of consumers in large cities are quite different from those in villages, Castrol India has designed unique products for each market segment, e.g., engine oil pouches for 10 cents each that can be sold in villages and small towns. One of its unique features is its distribution network that consists of almost 100,000 outlets throughout India. According to Evalueserve¡¦s estimates, there are at least 20 companies in a variety of sectors that could become as big as Castrol India, if they could receive proper advice and operational consulting, especially with respect to building a similar distribution network.


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