The Indian economy has experienced high GDP growth of around 7-8% annually over the past decade. However, high inflation and a large fiscal deficit present challenges. Private equity investments peaked in 2007 but have weakened in recent years due to market volatility and a lack of exit options. While India provides many opportunities for growth capital investments, regulatory reforms are still needed to further improve the investment climate. Overall, sustained GDP growth, policy reforms, and political stability will be important for India to realize its full economic potential.

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