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India Investment Climate

                                         (Audience - Walton College Students)




Manish Kheterpal (Member Governing Board, Fortune Institute of International Business –FIIB
                                                                            www.fiib.edu.in)

                                                                              January 2012
Indian Economy Overview – High GDP Growth with some fiscal deficit challenges
                                                                   Real GDP Growth(1)

(%)                                Economists predict the Indian GDP grow 7-8% annually over the next three years ?

  12                                                                                                                Forecast

  10
      8
      6
      4
      2
      0
      2001       2002         2003        2004     2005     2006       2007       2008       2009    2010    2011        2012           2013   2014


                                                          India Fiscal Deficit as a % of GDP(2)

(%)                         After a surge in fiscal deficit in 2009 / 10, the government is expected to bring down the deficit in 2011?


                                                                                                    6.2%      6.4%
                     5.9%

                                      4.5%                                                                                     4.7%
                                                  4.0%       4.1%
                                                                          3.5%
                                                                                         2.7%




                    Mar-03            Mar-04     Mar-05     Mar-06       Mar-07          Mar-08     Mar-09   Mar-10            Mar-11



Notes:
1) Source: Goldman Sachs, IMF
2) Source: Reserve Bank of India                                                                                                                2
Indian Economy Overview – High Inflation environment and Currency Depreciation

                                                 Inflation – Wholesale Price Index – All Commodities(1)

(%)           Inflation has been at historic high levels over the last 2 years. As of Nov 2011, the inflation was recorded at 9.1%

  12
  10
      8                                                                                                                                 9.1%
      6
      4
      2
      0
                            2006                2007              2008              2009               2010               2011           2012




                                                          Currency Exchange Rate for 1 USD(2)
                                                                           )

INR                                             The Indian Rupee has depreciated ~16% year to date            Average since 2003         45.15
                                                                                                              Max Rate (Dec 12)          53.85
  55

  50

  45

  40

  35
      2003            2004               2005          2006         2007          2008          2009           2010              2011    2012

Notes:
1) Source: Ministry of Commerce and Industry
2) Source: Reserve Bank of India                                                                                                            3
Indian Economy Overview – Long Term Stock Market performance and FDI
                            Relative Performance of Global Stock Market Indices – Average Annual Return since 2003(1)

(%)                                  The Indian stock market has produced an annual return of 18% since 2003

                       18.4%


                                                                                                                      10.9%


                                                 3.6%                      3.3%                 3.4%



                       Sensex             Dow Jones Industrials          S&P 500               FTSE 100        MSCI Asia Index



                                                        Foreign Direct Investment (FDI) in India(2)

($ B)



                                                                    +39%
                                                                              33
                                                                                         27                      25
                                                                                                        21
                                                   14             16


         2             3            4


        2003         2004          2005          2006             2007       2008       2009          2010   10 mo 2011


Notes:
1) Source: CapitalIQ
2) Source: Reserve Bank of India                                                                                                 4
Indian Economy Overview - Index Performance and FII Investments
                                                            Sensex down ~25% in 2011 (1)

(%)




                                                   Foreign Institutional Investment (FII) in India(2)
($ B)

                                                                                                        29
                                                                                           18
                                                                 17
                                              11
                           9                         8
           7
                                                                            2008                               2011

         2003            2004            2005      2006          2007                     2009          2010    -1


Notes:
                                                                              -13
1) Source: Yahoo Finance (6th January 2012)
2) Source: Infoline                                                                                                   5
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
                                                                                                                                       6
Indian Private Equity Scenario – Private Equity Investments “Type”
                                    Indian PE market is largely a “growth capital” market




Notes:
1) Source: VC Edge; KPMG Analysis
                                                                                            7
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
                                                                                                                      8
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
                                                                                                         9
Indian PE Scenario – PE Returns vs. Public Market Returns
                              Even though realized returns are attractive, total returns (including unrealized) are not




                                                                                         Realized investments only




                                                                                                                           Index
                                                                        Gross IRR                                         returns




Notes:
1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis                                                                  10
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
                                                                                                                              11
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




                                                                                    12
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




                                                                              13
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

                                                                            14
Thanks




                          Manish Kheterpal
Fortune Institute of International Business
                                 New Delhi
                            www.fiib.edu.in
                         www.fiib.edu.in/fiib

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India Investment Climate

  • 1. 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) (%) Economists predict the Indian GDP grow 7-8% annually over the next three years ? 12 Forecast 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 India Fiscal Deficit as a % of GDP(2) (%) After a surge in fiscal deficit in 2009 / 10, the government is expected to bring down the deficit in 2011? 6.2% 6.4% 5.9% 4.5% 4.7% 4.0% 4.1% 3.5% 2.7% Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Notes: 1) Source: Goldman Sachs, IMF 2) Source: Reserve Bank of India 2
  • 3. Indian Economy Overview – High Inflation environment and Currency Depreciation Inflation – Wholesale Price Index – All Commodities(1) (%) Inflation has been at historic high levels over the last 2 years. As of Nov 2011, the inflation was recorded at 9.1% 12 10 8 9.1% 6 4 2 0 2006 2007 2008 2009 2010 2011 2012 Currency Exchange Rate for 1 USD(2) ) INR The Indian Rupee has depreciated ~16% year to date Average since 2003 45.15 Max Rate (Dec 12) 53.85 55 50 45 40 35 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Notes: 1) Source: Ministry of Commerce and Industry 2) Source: Reserve Bank of India 3
  • 4. Indian Economy Overview – Long Term Stock Market performance and FDI Relative Performance of Global Stock Market Indices – Average Annual Return since 2003(1) (%) The Indian stock market has produced an annual return of 18% since 2003 18.4% 10.9% 3.6% 3.3% 3.4% Sensex Dow Jones Industrials S&P 500 FTSE 100 MSCI Asia Index Foreign Direct Investment (FDI) in India(2) ($ B) +39% 33 27 25 21 14 16 2 3 4 2003 2004 2005 2006 2007 2008 2009 2010 10 mo 2011 Notes: 1) Source: CapitalIQ 2) Source: Reserve Bank of India 4
  • 5. Indian Economy Overview - Index Performance and FII Investments Sensex down ~25% in 2011 (1) (%) Foreign Institutional Investment (FII) in India(2) ($ B) 29 18 17 11 9 8 7 2008 2011 2003 2004 2005 2006 2007 2009 2010 -1 Notes: -13 1) Source: Yahoo Finance (6th January 2012) 2) Source: Infoline 5
  • 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 6
  • 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 7
  • 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 8
  • 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 9
  • 10. Indian PE Scenario – PE Returns vs. Public Market Returns Even though realized returns are attractive, total returns (including unrealized) are not Realized investments only Index Gross IRR returns Notes: 1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis 10
  • 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 11
  • 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 12
  • 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 13
  • 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 14
  • 15. Thanks Manish Kheterpal Fortune Institute of International Business New Delhi www.fiib.edu.in www.fiib.edu.in/fiib