India Investment Climate

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India Investment Climate

  1. 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. 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-11Notes:1) Source: Goldman Sachs, IMF2) Source: Reserve Bank of India 2
  3. 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 2012Notes:1) Source: Ministry of Commerce and Industry2) Source: Reserve Bank of India 3
  4. 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 2011Notes:1) Source: CapitalIQ2) Source: Reserve Bank of India 4
  5. 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 -1Notes: -131) Source: Yahoo Finance (6th January 2012)2) Source: Infoline 5
  6. 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 issuesNotes:1) Source: VC Edge; KPMG Analysis 6
  7. 7. Indian Private Equity Scenario – Private Equity Investments “Type” Indian PE market is largely a “growth capital” marketNotes:1) Source: VC Edge; KPMG Analysis 7
  8. 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. 9. Indian Private Equity Scenario – Private Equity Exit Route / Challenges Public market continues to be the most popular exit for PENotes:1) Source: KPMG Sample Study and Analysis 9
  10. 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 returnsNotes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis 10
  11. 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 optionsNotes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis 11
  12. 12. India PE Opportunity – in countryMany 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 goodLarge 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. 13. India PE Opportunity - outwardFollowing strong economic growth and success, Indian companies are ambitiousand 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 ArabiaIndian government regulations restrict amount of capital Indian Companies caninvest as equity abroad 13
  14. 14. India Investment Climate – Opportunity & ChallengesOpportunities 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. 15. Thanks Manish KheterpalFortune Institute of International Business New Delhi www.fiib.edu.in www.fiib.edu.in/fiib

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