How 2010 Marks The Beginning
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  • 1. How 2010 marks the beginning of a new era for Franchisors and the Private Equity Investors Rakesh Sony Director, Motilal Oswal Private Equity Motilal Oswal Private Equity
  • 2. Contents Private Equity Franchising Case Studies Conclusion Motilal Oswal Private Equity 2
  • 3. PE emerging as an important and preferred funding source 500 20 Private Equity investments in India 400 405 15 312 No. of deals 300 302 287 US$ bn 280 10 $19.0 200 124 $10.6 5 107 110 100 $7.9 80 78 56 60 $4.4 $0.0 $0.1 $0.3 $0.5 $1.2 $0.9 $0.6 $0.5 $1.1 $2.0 18 0 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Motilal Oswal Private Equity 3
  • 4. What a PE/VC investor wants? § Secular businesses with established track record § Potential for high profitability § Growth potential and scalability Business § Strong cash flow § Clear exit opportunities with investment horizon of 5-7 years § Strategic inputs in the company by representation on the board etc § Dynamic, dedicated, ambitious team § Management with a vision Management § Management having a successful track record § Management having high integrity levels Motilal Oswal Private Equity 4
  • 5. Retail sector in China has witnessed good PE/VC interest Some of the major deals which happened in the sector in 2009 Sector Company Invested Fund/Company Investments Consumer Retail- Wumart Inc TPG, Legend & Hony USD 212 mn Supermarket Retail Capital Electronic and GOME Bain Capital USD 430 mn Appliance Retail Consumer Food Golden Han Unknown USD 42 mn Service Restaurants Restaurant Chain Consumer Fashion Daphne International TPG USD 80 mn Ladies Shoes Consumer Fashion- Guangzhaou Legend Capital USD 10 mn Hair Accessory Retail Meishan Motilal Oswal Private Equity 5
  • 6. Because of FDI restrictions PE/VC investors have shied away from investing in retail sector PE investments in retail sector 200 14 180 12 13172.3 158.4 12 160 Number of Deals 140 9 10 Whereas, PE has invested around 1USD USD mn 120 100 96.4 8 billion in franchised businesses (in the last 5 80 61 6 five years), with broking accounting for 60 3 4 40 22.2 20.6 3 chunk of the investments 2 20 PE Investment in Franchised Business 0 0 2004 2005 2006 2007 2008 2009 Food & Beverages Healthcare & Life Sciences Education PE investment in retail sector has just been ~1% of total deal value from 2004-09 Retail BFSI Motilal Oswal Private Equity 6
  • 7. Contents Private Equity Franchising Case Studies Conclusion Motilal Oswal Private Equity 7
  • 8. Franchising in India § Grew initially in the apparel and footwear sectors § Has gradually grown to cover a wide variety of sectors including food, BFSI, education, consumer durables, jewelry, books, home décor, etc § Rapid expansion of franchisees in non-metro locations § New models of revenue sharing models are introduced for franchisees Motilal Oswal Private Equity 8
  • 9. Franchising Models Model Pure Franchise Management Contract Hybrid Player Franchisee Franchisor Franchisee Franchisor Franchisee Franchisor Input Premises Y N Y N Y N Interiors Y N Y N Y(50%) Y (50%) Equipment Y N Y N Y(50%) Y (50%) Stocks Y N Y N Y (Consignm ent) Management Y N Y N Franchisee Margin on Sales Rent +% of Sales Higher of Minimum Returns Guarantee or Margin of Sale Motilal Oswal Private Equity 9
  • 10. What PE/VC investors looks for in a franchised businesses §Scalable business §Predictable cash flow §Franchise satisfaction via sharing of economic interest §Sustainable competitive position §Strong training program §Strong MIS §Quality control of franchisees Motilal Oswal Private Equity 10
  • 11. Pros and Cons of franchised business for PE Investor Attractive Features § Asset light model resulting in high ROI § Scalability § Pooling of interest § Less/No CAPEX for expansion thus quick expansion is possible § Franchise shoulder investment risk § Franchise business ability and understanding of local market is leveraged Deterrents /Risks § Operational issues of Inventory management with products having low shelf life § Risk of brand dilution due to lack of operational control § Contract violations by franchisee § Loss due to competition given better terms § Sharing of economic interest Motilal Oswal Private Equity 11
  • 12. Contents Private Equity Franchising Case Studies Conclusion Motilal Oswal Private Equity 12
  • 13. Broking industry has seen the maximum investments by PE/VC investors Motilal Oswal Securities Limited: 1,600 Network Well Diversified Financial services company 1,430 engaged in the business of stock broking, 1,400 1,289 1,293 private equity, investment banking, asset 1,200 management, wealth management, etc 1,200 PE Investors: 1,000 PE firms New Vernon and Bessemer invested USD 27.5 mn in April 2006 800 720 Business model (for broking activity): 600 Motilal Oswal has strong retail broking operations which are mostly run by its 375 400 franchisees 200 Performance: - Came Out with IPO in 2007 - - Awarded with ‘Best Franchisor in Financial FY05 FY06 FY07 FY08 FY09 Q3- Services’ in FY 2009 by Franchising World FY10 for second year in succession Motilal Oswal Private Equity 13
  • 14. Master franchising of global F&B brands in vogue in India for a while Jubilant Foodworks Limited: 450 426 Outlets Holds master franchise rights of Domino Pizza brand for India, Nepal, Sri Lanka and 400 366 Bangladesh 350 PE Investors: 306 JP Morgan and IPEF invested USD 11.6 300 mn in early 2000 250 241 Business model: Only Jubilant Foods can sell pizzas under 200 180 Domino’s brand in India 150 130 Performance: 100 - Provided successful exit via IPO to PE funds with approx 4x returns 50 - Have opened 274 stores spreading across 55 cities - FY07 FY08 FY09 FY10E FY11E FY12E Motilal Oswal Private Equity 14
  • 15. Koutons is a success story built on the strong franchisee model it built Koutons Retail India: 1,600 Outlets One of the largest integrated apparel 1,400 manufacturing and retailing company with 1,400 around 1,400 outlets across country 1,175 1,200 PE investors: UTI Ventures and Argonaut invested USD 1,000 22 mn in Nov 2006 800 Business model: 687 Approximately 98% of the stores in 600 franchise model 400 Performance: - Came out with IPO in 2007 206 - After PE investment , number of stores 200 74 have increase almost 5-6 times 27 - FY04 FY05 FY06 FY07 FY08 FY09 Motilal Oswal Private Equity 15
  • 16. Contents Private Equity Franchising Case Studies Conclusion Motilal Oswal Private Equity 16
  • 17. Benefits of building business through a franchisee model 100% of the outlets are own CAPEX 3,000 Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 500 1,000 1,500 2,000 2,500 Gross margins 250 500 750 1,000 1,250 Other expenses 100 200 300 400 500 EBIT 150 300 450 600 750 ROCE 5.0% 10.0% 15.0% 20.0% 25.0% 90% of the outlets managed by franchisees, who pay royalty and 10% are own CAPEX for own outlets 300 CAPEX for branding, etc 200 Year 1 Year 2 Year 3 Year 4 Year 5 Royalty 45 90 135 180 225 Revenues 50 100 150 200 250 Gross margins 25 50 75 100 125 Other expenses 10 20 30 40 50 EBIT 60 120 180 240 300 ROCE 12.0% 24.0% 36.0% 48.0% 60.0% Gross margins of the business are assumed at 50% of sales Other expenses have been assumed at 20% of sales Royalty receivable from franchisees have been assumed at 10% of sales Motilal Oswal Private Equity 17
  • 18. We should see higher investments in franchised businesses in the future § Several unorganized sectors are becoming organized (e.g. Education); which requires significant institutional capital § Improving lifestyle and income levels resulting in higher spend on branded apparels, F&B, etc; which would require greater amount of capital to have the reach § Any relaxing of FDI regulations would lead to increased investment in the retail sector Motilal Oswal Private Equity 18
  • 19. Thank You § Q&A Motilal Oswal Private Equity 19