Hot Sectors for PE Investment in India

Evalueserve, the global research and analytics firm, has identified three major groups of industries in India that are likely to be lucrative for private equity investors. One such group is that of hi-tech services and products, most of which are currently being exported. The second group consists of services that are mainly geared towards the Indian domestic market. And the third group comprises products and services related to high-end manufacturing and infrastructure.

The hi-tech services and products category includes Information Technology (IT) and application development, business process outsourcing (BPO), knowledge process outsourcing (KPO), drug research and clinical research outsourcing (CRO), engineering services outsourcing (ESO), software and solutions related to the consumer Internet, software as a service (SAAS), open source, software-cum-services, and telecommunications (both wireless and wire-line) products and services. This combined group of products and services is expected to grow at approximately 22% per year during the next five years and is likely to contribute about 1.3% out of a total nominal growth of 13% per year (including 5% annual inflation), i.e., approximately 10% of the total growth of the Indian economy.

The second group includes retail, travel and hospitality (e.g., airlines, hotels, theme parks), healthcare (including medical tourism, alternative medicinal centers and spas, hospitals, pharmacies, and laboratories), entertainment (including the Indian movie and TV industries), and private education. According to Evalueserve, this combined group of services and productized services is estimated to grow at approximately 19% per year during the next five years and is likely to contribute about 2.7% out of a total nominal growth of 13% per year.

Finally, the high-end manufacturing and infrastructure products and services group includes automobiles, automotive components, electrical and electronic components, specialty chemicals, pharmaceuticals, gems and jewelry, textiles, and sectors related to construction, real estate, and infrastructure. This combined group of products and services is estimated to grow at approximately 19% per year during the next five years and is likely to contribute about 2.5% out of a total nominal growth of 13% per year.

In addition, the government is also reducing its stake in many public sector undertakings (PSUs) and now owns only 51% in some of them. There are plans to open the banking sector completely to foreign competition by 2009 and further liberalize other sectors, such as metals and mining, utilities, and capital goods. The PSUs, which are in dire need of assistance in their attempt to become more productive, efficient, and aggressive, present a good opportunity, especially for activist PE firms.

Another opportunity for PE firms is in either buying—or helping their portfolio companies buy—captive units of multinational or domestic companies that are likely to be spun off from their parent companies. In 2002, British Airways sold a majority stake of its ITES captive unit in India, called WNS Global Services, to Warburg Pincus. General Electric followed suit two years later by selling Genpact to General Atlantic and Oakhill Capital Partners. WNS and Genpact, recently went public on the New York Stock Exchange and currently have a market valuation of more than USD 700 million and USD 3 billion, respectively. More recently, Philips sold its ITES unit to Infosys, and currently, Citigroup is negotiating with several firms to sell its ITES captive unit, eServe. Evalueserve’s analysis indicates that during the next 3–4 years, about 20–30 multinational companies are likely to sell their captive units—partially or wholly—since these companies do not consider the main tasks performed within such captive units as their “core” business.