Sunday, May 18, 2008

Valuations – The Indian way

To extract long term value, PEs should value Indian companies

It was an amazing experience at the Private Equity (PE) Summit that I recently attended. It was nice to see that there are so many global investors, hovering on Indian shores, exploring opportunities to locate ‘that’ Indian opportunity wherein they can invest. It was quite evident in the summit that currently there are more dollars that are chasing the very few companies that are thinking of raising the capital through the private equity route. In fact, over the past couple of years, India has been a hot destination for global PE firms. There has been a sustained upsurge both in number of PEs and the volume of funds that are being pumped into hordes of companies, starting from real estate to technologies. Reports state that in 2002, there were some 70 odd PE firms that were operative in India which has gone up to almost 400 by 2007. Also, along with it has gone up the value of deals which was around USD 600 million in 2002 to around USD 17 billion in 2007.

Though there are a number of reasons that make destination India attractive for the PEs, one of the most critical is the kind of return that Indian companies had been offering over some years. The return of equity for Indian companies had been around 18% plus, which has been considerably higher compared to the other Asian counterparts. No doubt the Indian firms have been doing fairly well but then a lot has also been contributed by the overall economic growth that India has been experiencing over the past few years. But the question would always remain that for how long will Indian companies, or for that matter Indian economy, sustain such growth? And for how long can they hold on to the valuations that they are commanding in the market (the fact that as more and more investments pour into Indian shores, the number of good investment opportunities would invariably shrink, further driving the valuations!). In fact, there are reports that the generic PEs, targeting the growth stage funding of mid sized companies are already paying an average of 25% premium on the targeted valuations and are bullish about their investments. And that is the most unnerving trend that is evolving out of the PE investment scenario in India as historically it has been observed that these sentiments cannot sustain over a long term period, and are indicative enough for a downturn!

In fact, to see to it that India does not hit an East Asia-like crisis; it is pertinent that Indian companies provide larger value for the investments that they have generated and that too on a sustained basis. And for that to happen, it is imperative for Indian companies to realise that India is strikingly different from its Asian counterparts, and so the growth model has to be equally different. If for other Asian markets, on account of their smaller markets, it was pertinent for them to scout for global markets, for Indian companies it is just the reverse for opportunities are huge within the country. It is not that Indian companies should not go global, they should, but then by building and catering to Indian markets alone they can derive sustained value for themselves and for their investors over a period of time!! For those who have understood this, have got their valuations correct!!


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