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
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
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
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
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
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19. Thank You
§ Q&A
Motilal Oswal Private Equity 19
