India Investment Climate
(Audience - Walton College Students)
Manish Kheterpal (Member Governing Board, Fortune Institute of International Business –FIIB
www.fiib.edu.in)
January 2012
2
Indian Economy Overview – High GDP Growth with some fiscal deficit challenges
Real GDP Growth(1)
Notes:1) Source: Goldman Sachs, IMF2) Source: Reserve Bank of India
(%)
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Forecast
India Fiscal Deficit as a % of GDP(2)
Economists predict the Indian GDP grow 7-8% annually over the next three years ?
4.7%
6.4%6.2%
2.7%3.5%
4.1%4.0%4.5%
5.9%
Mar-07Mar-06Mar-05Mar-04Mar-03 Mar-11Mar-10Mar-09Mar-08
After a surge in fiscal deficit in 2009 / 10, the government is expected to bring down the deficit in 2011?(%)
3
Indian Economy Overview – High Inflation environment and Currency Depreciation
Inflation – Wholesale Price Index – All Commodities(1)
Notes:1) Source: Ministry of Commerce and Industry2) Source: Reserve Bank of India
(%)
9.1%
2006 2007
6
4
2
0
2008 2009 2010 2011 2012
12
10
8
Currency Exchange Rate for 1 USD(2)
)
Inflation has been at historic high levels over the last 2 years. As of Nov 2011, the inflation was recorded at 9.1%
INR
35
40
45
50
55
2010 2011 20122005 200920042003 2006 2007 2008
The Indian Rupee has depreciated ~16% year to date Average since 2003 45.15
Max Rate (Dec 12) 53.85
4
Indian Economy Overview – Long Term Stock Market performance and FDI
Relative Performance of Global Stock Market Indices – Average Annual Return since 2003 (1)
Notes:1) Source: CapitalIQ2) Source: Reserve Bank of India
(%)
Foreign Direct Investment (FDI) in India(2)
The Indian stock market has produced an annual return of 18% since 2003
($ B)
10 mo 20112005 200920042003 2006 2007 2008
10.9%
3.4%3.3%3.6%
18.4%
MSCI Asia IndexFTSE 100S&P 500Dow Jones IndustrialsSensex
2521
27
33
1614
432
+39%
2010
5
Indian Economy Overview - Index Performance and FII Investments
Sensex down ~25% in 2011 (1)
Notes:1) Source: Yahoo Finance (6th January 2012)2) Source: Infoline
(%)
Foreign Institutional Investment (FII) in India(2)
($ B)
2011
2005 200920042003 2006 2007
20087
9 11
8
17
(13)
18
29
(1)
2010
-13
-1
6
Indian Private Equity Scenario – Private Equity Investments
PE investments sky-rocketed in the 2004 – 2007 period, peaked in 2007 ($14 B) and now still recovering from global crisis/local issues
Notes:1) Source: VC Edge; KPMG Analysis
7
Indian Private Equity Scenario – Private Equity Investments “Type”
Indian PE market is largely a “growth capital” market
Notes:1) Source: VC Edge; KPMG Analysis
8
Indian Private Equity Scenario – Private Equity Exits
PE exits peaked in 2010 but have weakened given recent market volatility and global cues…
Notes:1) Source: VC Edge; KPMG Analysis
9
Indian Private Equity Scenario – Private Equity Exit Route / Challenges
Public market continues to be the most popular exit for PE
Notes:1) Source: KPMG Sample Study and Analysis
10
Indian PE Scenario – PE Returns vs. Public Market Returns
Even though realized returns are attractive, total returns (including unrealized) are not
Notes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis
Gross IRRIndex
returns
Realized investments only
11
Indian PE Scenario – Returns have underperformed in the recent years
Returns have under-performed in recent years reflecting high entry valuations and lack of exit options
Notes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis
Page 12
India PE Opportunity – in country
Many opportunities for Growth Capital Investments…
Lot of sectors are still expected to grow at a healthy rate (10%+ EBITDA CAGR)
Given the size of market and country, companies need significant amounts of growth capital
Quality of top management (CEO & Direct Reports) generally very good
Large LBOs rare in the short term
Absence of disposals / sales by large companies in the short term
Regulatory restrictions on using debt for acquisition financing; offshore debt technology is inefficient
13
India PE Opportunity - outward
Following strong economic growth and success, Indian companies are ambitious and expanding abroad through acquisitions
Tata / Corus ($13bn) and Jaguar+Land-Rover, Birla / Novelis ($6.4bn) – structured as LBOs
Bharti winning 5th license in Sri Lanka and bidding for 3rd License in Saudi Arabia
Indian government regulations restrict amount of capital Indian Companies can invest as equity abroad
14
India Investment Climate – Opportunity & Challenges
Opportunities
Over-supply of PE capital for limited good opportunities. Why is everyone here? Differentiated strategy will still work
Public markets offers (selective) good opportunities (stocks down 25%+ in 2011) but dependent on the macro sentiment (US/Europe)
Challenges
Regulatory reforms required for PE – FDI caps, Debt in LBO’s, Taxation, Corporate Governance – expectations are low in near term
GDP growth has to be sustained - Policy reform and political stability required (7 state elections in 2012 and coalition politics?)
Interest rates rationalization can help give a boost to domestic consumption – this tool is available to Reserve Bank of India
Thanks
Manish KheterpalFortune Institute of International Business
New Delhiwww.fiib.edu.in
www.fiib.edu.in/fiib