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Columbia Presentation On India Virtus Global Partners
1. India’s Position in the Global Economy
October 11th, 2008
Presented by
Anil Kumar, Managing Director; email: akumar@virtusglobal.com
420 Lexington Avenue . Suite 300 . New York, NY 10170 . 212-297-6107 . www.virtusglobal.com
2. Key Messages
While India’s growth will slow down in the short-term, it will emerge as
one of the strongest economies in the world in the long-term.
India’s favorable demographics and service-led economy creates long-
term investment opportunities in several industry sectors.
In order to realize its potential, India needs to continue improving its
governance, control inflation, introduce credible fiscal policies, liberalize
financial markets and increase trade with its neighbors.
Page 1
3. 1. India’s Growth Potential
2. Indian Economy and Role of Reforms
3. Analysis of Key Industry Segments
4. Globalization of Indian Companies
5. Doing Business in India – Strategic and
Practical Considerations
Page 2
4. The credit crisis is creating a global financial turmoil
Liquidity drying up and frozen
credit markets
A massive “deleveraging effect”
Re-pricing of risk
Unwinding of structured credit
instruments
Crisis of confidence in banking
and savings
Reversion to more solid notions of
collaterals
Bailouts of institutions considered “too
big to fail” and the associated moral
hazard
Serious potential deflationary
cycle in the US that could
become a global contagion
Novel regulatory regimes and a new
paradigm for financial institutions
Page 3
5. There could be a strong negative impact on global
markets
Page 4
7. However, India will not suffer a systemic breakdown
Lack of leverage in India
Very small market for structured credit instruments in India
Overly conservative regulators in India
Page 6
9. Last few years of structural growth creates a cushion
High savings ratio and robust balance sheets
Productivity improvements achieved last few years
Evolution of a strong middle class
Page 8
10. India has a relatively high national savings rate
compared with other countries
Page 9
12. India’s growth will moderate in the next 2 years
Consumer spending has been affected by inflation
Corporate spending has been slow to due lack of fund raising options
Infrastructure spending might decrease due to foreign investors pulling
back
Page 11
15. India will emerge much stronger in the long-run
Risk-averse culture and strong regulatory framework will attract global
capital post credit-crisis
Demographic dividend will boost domestic markets and create long term
growth
Service led economy will create competitive edge.
India will play a greater role in the future geopolitical economy
India has relatively strong financial underpinnings and could become a
strong investment destination for the new power brokers - middle-east,
SWF, hedge funds.
Page 14
16. India labor force is young
http://www.mastercard-masterindex.com/asiapac/insights/1Q2006/images/chart_issue01_01.gif
Page 15
17. Services will continue to be the main driver of GDP
growth over the next two decades
Page 16
19. India has the potential to be the second largest
economy by 2050
Page 18
20. 1. India’s Growth Potential
2. Indian Economy and Role of Reforms
3. Analysis of Key Industry Segments
4. Globalization of Indian Companies
5. Doing Business in India – Strategic and
Practical Considerations
Page 19
27. It has become easier to invest into India
More sectors opened ; Equity caps raised in many other sectors Procedures
2000 on
simplified
Up to 100% under Automatic Route in all sectors except
2000
a small negative list
Up to 74/51/50% in 112 sectors under the
1997
Automatic Route 100% in some sectors
FDI up to 51% allowed under the
1991
Automatic route in 35 Priority sectors
Pre 1991 Allowed selectively up to
40%
FDI Policy Liberalization
Page 26
29. India has consistently improved over the last 17 years
•Opportunities to enter new sectors as the reforms process opens
Progressive Reforms Process them up for foreign direct investment (FDI). For example, Single
Brand Retail, Life and General Insurance
•Growing GDP and FDI, falling rates of interest and maturing capital
markets creates private equity investment opportunity in
Strong Economic Environment infrastructure, telecom, cement, toll roads, bridges, manufacturing,
technology, and pharmaceuticals
•Growing consumer population expands markets across sectors
•Opportunities to use India as a test market for clinical trials and
Large Domestic Market
developing products for the global market
•Growing through acquisitions of strong Indian companies across
sectors
•Availability of raw material and highly skilled workforce
•Opportunities to set up manufacturing bases in India, both for fulfilling
local demand, as well as for developing a global sourcing hub
Availability of Resources •Opportunities to set up R&D, software development and engineering
centers that cater to their global operations
•Opportunities to set up centers for business process outsourcing
Leveraging India as a source of high quality managerial talent
Page 28
30. India has good growth potential
2007 Global Services Location Index
2007 Global Retail Development Index (GRDI)
100
… India is the top
India 3.2 2.3 1.4
destination in the
80
AT Kearney Global China 2.9 2.3 1.4
Retail Development
GRDI Score
60
Index (2007) Malaysia 2.8 1.3 2
Thailand 3.2 1.2 1.6
40
Brazil 2.6 1.8 1.5
Services sector 20
Indonesia 3.3 1.5 1.1
attracted interest of
major global players 0
Financial structure People and skill availablity
and large India Russia Vietnam Ukraine China Chile Latvia Business environment
investments are
pumped in it
Projected GDP Growth Rates for Select Upcoming Economies
8
AT Kearney has
placed India as
the most
GDP Growth Rate (%)
6
preferable
destination for
Services sector
4
(2007)…
India is expected to
2
outperform its rivals
in the BRIC, in terms
of GDP growth rate,
from 2015 0
onwards… 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
Brazil China India Russia
Source: Goldman Sachs, “Dreaming with the BRICs”
Page 29
31. Foreign Direct Investments have increased rapidly
FDI Inflow - India: 2001-08
18,000
15,730
185 percent
12,699
Increase
13,500
India is ranked
USD Million
second in AT
9,000
Kearney’s FDI
5,546
confidence index 4,222 3,755
3,134
4,500 2,634
(2007)
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (till
December)
Net FII into India: 2001-07
18
16.1
16
FDI inflow for the 14 149 percent
Increase
12
USD Billion
period 2006-07 10.2
10.0
9.4
10
witnessed a growth
8 6.7
of 185 percent over
6
the same period last 4
1.8
2
year 0.6
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* FII growth momentum was restricted because of Sub Prime Crisis in 2007-08
Page 30
32. India’s standard of living has increased
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33. India is still at an early stage of urbanization
Page 32
35. There is a lot of room for improvement
Page 34
36. Big challenges remain in the path to development
India could be 40 times bigger by 2050.
To achieve this, India needs to implement many changes.
India needs to improve its governance, control inflation, introduce credible
fiscal policy, liberalize financial markets and increase trade with its
neighbors.
It also needs to significantly raise its basic educational standards and
increase the quality and quantity of its universities.
India needs to boost agricultural productivity, improve its infrastructure and
environmental quality.
Page 35
37. 1. India’s Growth Potential
2. Indian Economy and Role of Reforms
3. Analysis of Key Industry Segments
4. Globalization of Indian Companies
5. Doing Business in India – Strategic and
Practical Considerations
Page 36
38. Investment Opportunities
Power Generation
Infrastructure Roads & Ports
Supply Chain/ Logistics
Information Technology/ Business Process Outsourcing
Services Financial Services
Entertainment, Media, Travel & Tourism
Auto Components
Manufacturing
Power Distribution Equipments
Metals and Mining
Page 37
42. Warburg Pincus - one the leading private equity
investor in the US
Leading private equity investor since 1971
•
More than USD 35 billion of assets under management and has nine offices around
•
the world.
Active portfolio of more than 125 companies.
•
Since inception, it has invested more than USD 31 billion in approximately 600
•
companies in 30 countries
Investments across a range of sectors, including financial services, healthcare,
•
industrial, technology, media and telecommunications, energy, consumer and
retail and real estate.
Offices in Beijing, Frankfurt, Hong Kong, London, Mumbai, New York, San
•
Francisco, Shanghai and Tokyo
Page 41
43. Warburg Pincus investments in India
Over a twelve-year period, funds sponsored by Warburg Pincus have invested
•
more than USD 2 billion in India in over 15 companies
Industry Investment year size
Telecom Bharti Tele-Ventures 1999 $300 mn
BPO WNS 2002 $70 mn
Manufacturing Amtek Auto 2006 $65 mn
Housing Sintex 2005 NA
Power Equipments Havells India 2007 $110 mn
Hospitality Lemon Treee Hotels 2006 $70 mn
Media Lakshya Media 2008 $65 mn
Healthcare Max India 2005 $35 mn
Ports Gangavaram Ports 2006 NA
Energy Moser Baer 2000 $62 mn
Financial Services ICICI Bank 2007 NA
Page 42
44. Case- Study – Warburg’s investment in Bharti Telecom
In early 1999, Warburg Pincus analyzed likely changes in India’s regulatory
environment and tariff policies.
After considerable due diligence conducted on three continents, Warburg Pincus
identified significant opportunities in the Indian telecommunications sector and
invested $300 million in Bharti.
Warburg assisted Bharti with acquisitions of additional cellular properties and
with securing a strategic partnership with Singapore Telecom, which subsequently
committed $600 million in capital to Bharti.
The company was listed on Indian stock exchanges in February 2002. Now known
as Bharti Airtel, the company has a market capitalization in excess of $35 billion
and is a dominant player in the Indian telecommunications market.
Today, Bharti Airtel is structured into three individual strategic business units
(SBU’s) - mobile services, telemedia services (ATS) & enterprise services. The
mobile services group provides GSM mobile services across India in 23 telecom
circles, while the ATS business group provides broadband & telephone services in
94 cities
Page 43
45. Bharti Airtel – Current Profile
In 1999, Bharti had only 100,000 subscribers
Page 44
48. Growth of the telecom industry in India
India is the fifth largest telecom services market in the world; US$23
billion revenues in FY 2007
290 million subscribers - 39 million fixed lines and 251 million wireless -
(February 2008)
The telecom subscriber base has grown at about 40% p.a. over the last
four years
Projected growth of 27% p.a. to reach 500 million subscribers by March
2010
Over 8 million new users are added every month – mostly in wireless
Page 47
50. India’s macro factors in play in 1999 to 2001
Real interest rates too high to sustain
Large market – double edged sword
Increasing GDP growth
Democratic government
Growing middle class consumers
Majority of population between 18 – 25 years of age
Strong education system
IT boom
Page 49
51. Indian telecom industry – positive macro factors in play
in 1999 - 2001
National Telecom Policy encouraging
Domestic Private Investment
Foreign Direct Investment
Competition to Fixed Line Service providers
High Installation Fees
Order Backlog
Mobile telephone considered as a status symbol
Markets were price elastic
No company had national presence
Telecommunication is a pre-requisite for growth
Page 50
52. Indian telecom industry – negative macro factors in play
in 1999 - 2001
Lack of regulatory clarity
Economic viability of telecommunication projects
Restriction on licenses
Monthly fixed license fee to government
No investor interest – No clarity on exit route
Bharti had presence only in North India
Page 51
53. Warburg’s initial strategy
India growth story
Long term investment
Financial & operational efficiencies
Working with management
Seek strategic partner
Accelerated growth & competitiveness
Page 52
56. Ten Tips to Successful Due Diligence
1. Know the mindset of the target company
Comprehensive information required for the due diligence process is not readily
available with the Indian companies due to lack of detailed management information
system. For example, detailed schedule of margins by product and by customer may
not be easy to come by with these companies. The forecasting methodologies of such
small and medium sized Indian companies are not very robust, often leading to
simplistic projections. The forecasts tend to be aggressive, without a track record to
boot.
2. Understand key differences in doing a due diligence in western countries and
in India
Going in for a due diligence process with the right expectations is a critical success
factor for US investors. The quality of financial statements, financial infrastructure
and business and business process will be lower and less explicit than western
investors are accustomed to. This results in the need to explore more risk areas and
take more time for the due diligence.
Page 55
57. Ten Tips to Successful Due Diligence
3. Listen for the word “N0'”:
Asian culture is less direct in some respects. Western investors rarely hear their
Indian counterparts say “no” even though they do not mean “yes''.
4. Look out for Hidden Skeletons:
Inadequate disclosures impede the ability to access critical information that might
alter the investor's perception with regard to the value of the company, environment
issues and aggressive tax positions among others.
5. Evaluate Corporate Governance:
Companies are slowly realizing the importance of corporate governance and some of
the leading organizations are benchmarking to global standards. Some others are
moving towards improvement.
6. Keep an Eye on Related Party Transactions:
As a hangover of the licensing raj, Indian businesses are generally structured as
conglomerates or group businesses which create extensive related party transactions.
Page 56
58. Ten Tips to Successful Due Diligence
7. Avoid Legal Minefields
Weak corporate governance is compounded with tardy legal systems where dispute
resolution often remains a distant goal.
8. Communicate with Care
In any transaction, communication must be handled with utmost care. Sensitivity to
Indian culture with regard to dealing with the owners who are also the entrepreneurs
of the company will help to make the venture more rewarding.
9. Manage the Control Freaks
It is often observed that founding members of a start-up will refuse to give up control
and settle for a minority ownership stake (a common condition for many start-ups in
exchange for Private Equity funding).
10. Think Global, Act Local
Firms with a presence in India have a distinct edge due to their wide networks of
contacts and experience of the Indian business environment.
Page 57
59. Information gaps and challenges facing Warburg
Betting on aggressive forecasts
Loss making business
Entering as a minority stakeholder
Ambiguity in government policies
Fragmented sector – cost efficiency
Mobile telephony was still a luxury among Indians
Business model based on cost-volume-pricing
Page 58
60. India’s growth story
Business Growth Opportunities
High Interest Costs
Confidence on Management
India’s Demographic Pattern
Open Economy
Global Presence
Page 59
61. Warburg’s growth strategy for Bharti
Think Big
BT- Initial Suboptimal Strategy – Bell North
WP -Change in Plans – Pan India Presence
Growth Plans
BT - Management Approach to build business from scratch
WP - Time sensitive: Growth by Acquisition
Restructuring the Corporate Structure
BT- Adhoc structure
WP – Buy back stakes to reduce conflicts of interest
Inclusion of Strategic Partners - SINGTEL
Page 60
62. Warburg’s investment in Bharti was a landmark
transaction for India
The deal equaled one – third of total PE investments in India till date
PE investments in India were only 0.2% of total GDP
FDI was only about 1% of GDP
First Investment done banking upon the “India Growth Story”
Foreign exchange fluctuation was a matter of concern
Investment in unorganized sector
Investment in a privately owned company
Page 61
71. 1. India’s Growth Potential
2. Indian Economy and Role of Reforms
3. Analysis of Key Industry Segments
4. Globalization of Indian Companies
5. Doing Business in India – Strategic and
Practical Considerations
Page 70
72. Indian companies acquiring overseas
Share of India in global market
10,000.0 4,520.0 3.0%
3,935.0
1,976.8
1,628.2
1,087.4
1,028.1
1,000.0
2.1% 2.0%
USD billion
28.4
100.0
1.2% 38.4
16.8
1.2%
21.2 1.0%
10.7
4.4
10.0 0.7% 3.9 25.9
3.9 0.5%
0.5% 1.7
3.2 9.4
0.1 7.4
0.6 2.7
2.7
1.5
1.0 0.0%
2002 2003 2004 2005 2006 2007*
Inbound Outbound Dom estic
Total Value of Global Deals % Share of india
45
40
35
30
25
20 40
34
15
23
10
5
0
2006H1 2007H1 2008H1
US-bound Transactions 2006H1 – 2008H1
Industry Breakdown of US-bound Transactions in 2008H1
Page 71
73. Summary of US-bound acquisitions by Indian companies
in 2008
In the first half of 2008, Indian companies accounted for a total of 34 US-bound acquisitions
with a cumulative transaction value of over $5.1 billion. This represents a 15% decrease in
terms of volume and a 30% drop in value compared to the first half of 2007.
Deals less than $100 million accounted for over 90% of the total transaction volume but only
10% of the reported transaction value. Whereas, it was the opposite for deals greater than
$1 billion in size, which comprised 10% of the total volume and 90% of the reported value.
No transactions were reported in the $100 million to $1 billion range. This reflects the
dichotomy facing Indian companies – well-capitalized large Indian companies are buying
value assets for cheap while mid-size firms are adopting a cautious approach.
Mega-size deals included Tata Chemicals acquisition of General Chemicals for $1 billion,
GMR Energy’s purchase of 50% equity in Intergen for $1.1 billion and Sterlite Industries
announced bid for Asarco valued at $2.6 billion.
IT/ITES remains the most acquisitive industry capturing over 50% share of the total US-
bound transactions by volume, followed by life sciences (10%), metals & mining (6%) and
agriculture (6%). Other industries accounted for less than 3% each in terms of volume.
Over 70% of the transactions involved acquisition of 100% stock for cash consideration.
These transactions generally had an earn-out structure, where a portion of the deal value is
paid on future milestones.
Page 72
74. Cross border acquisition trends
High debt-to-equity ratio and low earnings in the US is creating value-buying
opportunities for Indian companies.
Increasing competitive pressures, emerging global opportunities and the decline
in overseas trade and investment barriers are encouraging Indian companies to
seek acquisitions in the US.
Need to gain scale in terms of size, product offerings and geography.
Change from a cost-centric approach to a profit-margin focus.
Need to climb up the value chain
Page 73
75. US-bound acquisitions are propelled by several factors
Large consumer markets, transparent business processes, robust legal
environment, advanced technologies, skills and knowledge capital.
As US markets tend to be mature and saturated, it often proves difficult
for Indian companies to gain market share without acquisitions.
Easy access to the world’s largest market and customer base through
marketing and distribution channels of the acquired company.
Increased competition within the domestic markets.
The global slowdown has created opportunities to buy US-based
companies at lower valuations.
Acquisition of specific skills, knowledge and technology.
Page 74
76. Case Study – Gitanjali’s acquisition of Samuels
Gitanjali Gems Ltd., a DTC sightholder, is one of the largest integrated diamond and jewelry
manufacturers and retailers in India. Its operations include sourcing of rough diamonds from
primary and secondary source suppliers in the international market, cutting and polishing the
rough diamonds for export to its international markets, and the sale of diamonds and other
jewelry through Gitanjali's retail operations in India, as well as in international markets.
Gitanjali’s objective of an acquisition in the US was:
Global vertical integration to create higher margins
Direct access to consumers in the US
Find an ideal platform for future growth
Samuels operates 97 retail jewelry stores in 18 states and also sells jewelry online. Measured
by the number of retail locations, Samuels is the tenth largest specialty retailer of fine
jewelry in the United States.
Samuels’ acquisition was in line with Gitanjali's objective to conform to a vertically integrated
model, one that benefits from all the efficiencies that are realized through control of the
entire supply chain, inclusive of retail.
Page 75
77. Samuel’s was a good fit based on potential
synergies
The quality of merchandise, the format of stores, the focus on branding
Good Strategic Fit makes Samuel’s good strategic fit.
100 stores provides good geographic footprint
Samuel’s could be good platform for future bolt-on acquisitions
Gross margin improvement provide the ONLY opportunity for
profitability
Improve sales through focus on off-mall stores, branding, premium
Potential Growth
merchandising
Opportunities
Optimize SG&A through reducing per store employee count to 5
Replace/ improve ADS private label program to improve sale
approvals.
It might take significant time to implement gross margin improvements
It will be operationally challenging to improve profitability at store
Risks
level and improve price points
The management seems good with operations but has faced challenge
creating profits
Page 76
78. Transaction integration plan
Increase Same Store Sales and Contribution
Increased focus on designer jewelry collections
Realize opportunity in bridal and loose diamonds
Gross Merchandise Margin Expansion
Renovation/ Relocation of Existing Stores to improve merchandise presentation
Open more Samuel’s Diamond Stores
(off-mall location, currently about 11 of these stores)
Capitalize on more effective marketing efforts
Optimize use of proprietary customer list
Increase radio and billboard advertising
Increase awareness through cable tv placements
Page 77
79. Action plan post transaction
Improve Sales:
Target 1-3% price point increase through introduction of proprietary designer
collections.
Increase brand value through improved marketing, external PR agency, higher ad
spends and refined message.
Terminate ADS private label credit program to RCS credit card program to improve
customer credit approval rates.
Improve Gross Margins:
Improve margins from current 47.2 % to 51% in 24 months through direct sourcing of
diamonds as follows:
— 0 – 6 months : 0% gross margin improvement
— 6 – 12 months: 1.5 % gross margin improvement
— 12 – 18 months: 1.5% gross margin improvement
— 18 – 24 months: 1 % gross margin improvement
Enhanced Sales Associate Productivity through more training programs.
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80. Financials
Optimize Selling, general, and administrative expenses
Reduce average store employee count from 6 to 5.
Close non-profitable stores
Store profitability in 2006:
— Stores that lost < $10,000 = five stores
— Stores that lost between $10,000 and $50,000 = four stores
— Stores that lost > $50,000 = seven stores
Increase advertising spending by 15 -20% to focus on branding.
Rationalize product and customer portfolio
Discontinue unprofitable product lines
Reduce number of skus
Page 79
81. 1. India’s Growth Potential
2. Indian Economy and Role of Reforms
3. Analysis of Key Industry Segments
4. Globalization of Indian Companies
5. Doing Business in India – Strategic and
Practical Considerations
Page 80
82. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 81
83. Creating an India Entry Roadmap
Stage 1: Create Stage 2: Design Stage 3:
Strategy Phase Implement
• Market Study/ • Operating Model • Business Setup
Industry Assessment • Organization Design • Statutory and Legal
• Competitive Requirements
• Partner Selection
Landscape Analysis • Risk Management
• Preparing Key
• Feasibility Stakeholders • People
Assessment • Legal & Regulatory • Infrastructure
• Market Positioning Setup • Employer Value
• Investment • Investment Proposition
Strategy Structuring • Funding
• Location • Partner Due
Assessment Diligence
Page 82
84. About Virtus Global Partners
One of the Leading US-India Cross Border Transaction Advisory Firms
• We advise funds and corporations on US-India cross border transactions such as mergers
& acquisitions, strategic alliances, due diligence and market feasibility research
• Principals have several years of relevant industry experience in US and India, both
transactional and operational
• Strong capabilities in Global Strategic Consulting, Analytics, Knowledge Process
Outsourcing and Information Technology Services
• Headquartered in New York with offices in Mumbai, New Delhi, Chennai and Kolkatta.
Key transactions
Page 83
85. Our Approach to Cross Border Advisory
Process
Review Strategy Assess and Plan Monitor and
Implementation Measure
Future Business
Key Business •
•
Sourcing
•
Requirements
Strategies, Goals Current State
•
Arrangements
Financial portfolio
and Objectives • Assessment
Supply Chain
•
goals
Financial
• Performance
•
Improvements
Strategic
Portfolio • Measurement
Financial Portfolio
•
Acquisition and
Improvements (baseline and
Realignment
Sourcing Goals
Strategic
• going-forward)
Strategic
•
Organization and
Acquisition • Reality Testing
•
Acquisition
Operating Model
Sourcing
• Customer
•
Operational
•
Performance
Arrangements • Feedback
Improvements
Management
Key Issues &
• Continuous
•
IT process/ E-
•
Outsourcing
Opportunities • Improvement
commerce
Opportunities Model
Implementation
Strategic Acquisition and Sourcing Arrangement
E-commerce and Infrastructure
Business Process Improvements
Financial Portfolio Optimization
Organizational and Operating Model
Page 84
86. Our Office Locations
New York (Headquarters):
The Graybar Building
420 Lexington Avenue
Suite 300
New York, NY 10170
India Offices:
Delhi, India Mumbai, India
Building No. 8, 2nd Floor 4th floor, Electric Mansion
Tower-A Appasaheb Marathe Marg,
DLF Cyber City, Phase II Prabhadevi
Gurgaon - 122002 Mumbai - 400 025
Chennai, India Kolkata, India
V Floor, Karumuttu Centre FMC Fortuna, A-13 V Floor
634 Anna Salai 234/3A, AJC Bose Road
Chennai - 600 035 Calcutta - 700 020
Page 85