In 1999, Warburg Pincus picked up a stake in an emerging company called Bharti Tele-Ventures. By ’01, it had invested close to $300 million in a company yet to make a profit. Sceptics sniggered and there was a time when the company’s stock price plunged lower than the issue price, However, Warburg remained confident and finally, the bet paid off. When Warburg sold its stake, it walked away with a profit of $1.3 billion. It was a landmark deal, in that private equity (PE) became a force to reckon with.
From $1.1 billion invested in 60 deals in ’04, to $7.9 billion in 302 deals in ’06, PE has grown by a whopping 600%. In the first half of ’07, 200 deals worth $6.82 billion had been announced. It’s likely that the total investment will touch $10 billion by the year-end. Blackstone, Carlyle, Farallon, Chrys Capital, Morgan Stanley and Temasek are some companies that have committed millions to the India Growth story. Some have entered as venture capitalists, which generally focus on early stage investments, while others are pure PE buyouts.
PE has come a long way from providing fuel (funds) to the fiery growth of India Inc. It helps investee companies with a whole host of activities — from forging strategic alliances to assisting in corporate governance, from providing management advice to budgeting.
To understand the PE impact on India Inc, ET Intelligence Group decided to scrutinise the performance of companies receiving PE funding. We did this by tracking deals concluded before January ’07, since it’s too early to comment on companies that received money in ’07. We analysed data for approximately 100 listed companies, spread across sectors like gems and jewellery, tea, shipping, aviation, edible oil and garments, to name a few. We compared the performance of companies receiving PE funds with those of their peers in the corresponding ET sectoral indices that did not get any such funds.
We discovered that by and large, companies which received funding seemed to do much better than their peers on the following parameters — profitability, cash profits, sales and investor returns. There were some intangible benefits too, such as greater recognition and increased media attention. Let’s take a look at how various industries have fared in the PE play.
Information Technology: Expectedly, the IT industry has cornered the biggest chunk of the PE pie. So, how have these companies done? In ’05, the sales growth of PE-funded IT companies was a modest 26%, against 36% growth of the ET Infotech index. However, the profit growth was a huge 255% vis-à-vis 40% of non-funded companies. This trend has continued into ’07.
Banking and Financial Services Industry (BFSI): BFSI is another sector that is attracting PE players like a pot of honey attracts bees. Banks like ICICI Bank, Centurion Bank of Punjab, Axis Bank and Development Credit Bank have seen heightened interest.
The ET Bank index sales growth for ’06 was 17% vis-à-vis 48% growth of the PE-funded companies. The profit growth for the index for the same period was a mere 15%, in contrast to 61% reflected in PE-funded companies. The indices’ performance did not show any improvement in FY07 as well. Profit growth was muted at 16%, while PE-funded companies were zooming with 45% profit margins. PE firms are eyeing this sector in a big way and are trying to get a toehold into it, with IFCI being the latest company.
Healthcare & Pharmaceuticals: Healthcare and pharmaceuticals comprises another segment where PE players have been active in both ’05 and ’06. For FY06, sales growth of companies constituting the ET Pharma index was 23% vis-à-vis the 20% growth of PE-backed companies. Again, the profitability growth was an enormous 80%, against 25% shown by the index.
The important point here is the increase in the research and development (R&D) expenditure. Dr Reddy’s Labs, Elder Pharma, Ranbaxy Labs, Arch Labs and Apollo Hospitals are among those which are engaged in both capital, as well as current expenditure on R&D. Having global leaders on the board has also helped to bring new technology into the business, thus cutting costs. Although it’s a little early to take a call, the PE influence does seem to be visible in the profits of some of these companies. For example, Glenmark Pharma, Arch Pharmalabs and Dr Reddy’s Labs saw their profits double in ’07.
Automobiles: Always on the look-out for valued investment opportunities, PE firms have also been snapping up companies which may have fallen out of favour with the market. In the Indian context, the automobile sector as a whole has been beaten down, for a while. But PE firms seem to like the auto ancillary space.