the role of private equity in india's growth story
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December 18, 2015
Gautam Dhawan Partner- Aurum Equity Partners LLP
The Role of Private Equity in India’s Growth Story
Strictly Confidential 2
Aurum Equity Partners LLP
An investment banking firm, with a depth of diverse-sector experience.
Strictly Confidential
• This note is presented solely for the internal use of the recipient to whom it is marked by Aurum and does not carry any right of publication or disclosure to any other party. This note is incomplete without reference to, and should be viewed solely in conjunction with, the verbal briefing provided by Aurum.
• In preparing this note Aurum has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from published and public sources. Accordingly, neither Aurum nor any of its affiliates, shareholders, directors, employees, agents or advisors make any representation as to the accuracy, completeness, reasonableness or sufficiency of any of the information contained in the note, and neither of them shall be liable for any loss or damage (direct or indirect) suffered as a result of reliance upon any statements contained in, or any omission from this note and any such liability is expressly disclaimed.
• Aurum has developed this note on its own behalf and without prejudice. This note should not be construed as an offer to sell any securities in or assets of any of the companies referred to in this document, or an invitation to offer.
Disclaimer
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1 SECTION Overview of Private Equity in
India
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PE – A Source of Stable Capital
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In 2015 PE invested have touched $17.5 bn – An increase of 34% over 2014 (Source: PwC)
PE is finding greater acceptance amongst entrepreneurs – A stable source of capital and has the potential of transforming businesses
> $ 100 bn invested
since 2001
2015
Source: McKinsey Analysis
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Investments have been broad based – in over 3,100 companies across 12 major sectors
~80% of Investments by volume have been channelized across early stage to mid sized companies –
which are going to play a critical role in India’s growth story
PE - Concentrated on Early to Mid Sized Companies
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Source: McKinsey Analysis
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Higher Growth Revenues
Higher Earnings Growth
As per Mckinsey Analysis , PE backed companies have grown faster in revenues and earnings growth amongst others
PE backed companies have also helped accelerate employment, export sales and M&A’s
PE - Favorable Impact on Investee Companies
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Source: McKinsey Analysis
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2 SECTION Role of Private Equity
Investors
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Role of Private Equity – Financial and Strategic
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Value Creation
Operational
Corporate Governance
Strategic
In addition to stable capital, Private Equity also provides “strategic” capital as shown below:
Efficiencies R&D / innovation Geographical expansion (including International focus )
Talent attraction & retention
New Business Initiatives
M&A / JV’s Further capital raise Independent committee
Board Oversight Auditors
Superior financial and returns profile
Optimizing Valuations
Transformational
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PE has helped shape Key Sectors in India
Evolved into a large industry Companies have achieved
leadership positions Key beneficiaries: Bharti, Idea,
Tata Teleservices, Vodafone, Bharti Infratel, Viom Networks
PE Backed Companies
Telecom
Amongst the biggest industries globally
Indian pharma firms have achieved global operations
Expansion of healthcare delivery outside metro cities
Key beneficiaries: Intas, Mankind, Emcure, Famy care, Manipal, Care Hospitals
Most active sector in deal volume terms
Key beneficiaries: Flipkart, Snapdeal, Olacabs, iGate, Mphasis, Genpact, EXL Services
Pharma/ Healthcare
Several PE investments in Private Banks, NBFCs, Brokerages, Micro-finance institutions etc
Key beneficiaries: Yes Bank, HDFC Bank, UTI Bank, AU Financiers, IIFL, PNB Housing
Financial Services
Technology
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3 SECTION Select Case Studies
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A) VRL Logistics
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VRL Logistics is a pan India surface logistics and parcel delivery service provider
Raised Private Equity of Rs 1,750 mn in April 2012
Raised Rs 4,679 mn in April 2015 through an IPO (including secondary portion)
Source: SEBI, Thomsonone, BSE * Employee count as on December 31, 2014
11,304 13,255
14,938 16,712
FY12 FY13 FY14 FY15
Consolidated Revenue
INR mn 17% 15% 14%
16%
FY12 FY13 FY14 FY15
Consolidated EBITDA
18% 17% 18%
29%
FY12 FY13 FY14 FY15
ROCE %
9,369 10,748 11,708
FY13 FY14 FY15
Average Wages
INR per month
13,187 13,526
14,092
FY13 FY14 FY15*
Number of Employees
157 131 149
287
FY12 FY13 FY14 FY15
Direct Taxes paid
INR mn
VRL Logistics: Track Record of Delivering Growth
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VRL Logistics: Better placed than Peers
Source: SEBI, Thomsonone, BSE
Performance of VRL Relative to Peers
Current EV/Sales#
(LFY Basis) Revenue Growth
(FY12-FY15)
Avg. EBITDA Margin (FY12-FY15)
14%
12%
7%
15%
7%
8%
2.4
1.1
1.1
Comparison with Peers
Transport Corp of India
Gati Limited
VRL Logistics
Current EV/ EBITDA#
(LFY Basis)
14.8
13.4
13.4
VRL has performed better than its competitors on historical basis
Future earnings growth (FY 2015-17) is also estimated to be higher relative to peers
PE Multiple (FY 2017 basis)
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VRL Logistics: Classic Case of Transformation
Market leader
Emerged as one of India’s leading surface logistic and parcel delivery provider
Pan India operations
Operates a fleet of 4,000 vehicles across 600 branches
Consistent track record of financial performance and returns
Sales growth at a CAGR of 15%
Healthy EBITDA margins of 16%
Return on Capital Employed of 29%
Job creation
Over 14,000 employees
Value creation
Huge value unlocking during IPO
Higher Market capitalization relative to established peers
Strong growth outlook relative to established peers
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B) Coffee Day Enterprises (“CDEL”)
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CDEL – A Diversified Conglomerate
CDEL operates:
Coffee retail business; Other businesses- IT & ITES technology parks, logistics, financial services, hospitality and logistic solutions
Private Equity invested INR 8,716 mn (effective 26% equity stake) in 2010 and raised INR 11,500 mn fresh equity in October 2015
Source: SEBI, Thomsonone, BSE
10,244 15,653
20,996 22,870 24,794
FY11 FY12 FY13 FY14 FY15
Consolidated Revenue
INR mn
13% 12% 14% 14% 15%
FY11 FY12 FY13 FY14 FY15
Consolidated EBITDA
1,100 1,286
1,454 1,568 1,518
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Café Network Outlets
1% 1%
2% 2%
2%
FY11 FY12 FY13 FY14 FY15
ROCE %
228
86
466
171 210
FY11 FY12 FY13 FY14 FY15
Direct Taxes paid
INR mn
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CDEL – Miles ahead in Coffee Retailing in India
Market leader
Café Coffee Day has emerged as the largest in the niche chained café segment
Vertically integrated – Procurement, processing to retailing
Store count of 1,538 (as on June 30, 2015)
Café footprint is nearly four times larger than the cumulative footprint of the next four competitors
Investment in non-coffee related businesses
Real Estate, IT, Financials, Logistics
Building diverse revenue streams
Job creation
Value creation
Equity value doubled over the period 2011-2015 (Currently trading price below its listing price)
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C) Paras Pharmaceuticals
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Paras – A Leader in OTC Segment
Source: MCA
Operated with a portfolio of leading OTC Health and Personal Care brands:
Moov- Pain relief gel D’Cold- Cold & flu remedy Dermicool- Talcum powder Krack- Skincare cream
Actis and Sequoia together controlled 70% of the company
In 2010, Reckitt Benckiser acquired Paras for INR 32,600 mn EV/ Sales: 8.1x EV/ EBITDA: 30x
In 2012, Marico acquired personal care brands (Set Wet, Livon, Zatak, Eclipse and Dr Lips) from Reckitt Benckiser
3,012 3,353 2,954
3,820
FY07 FY08 FY09 FY10
Standalone Revenue
INR mn
20% 22% 24% 27%
FY07 FY08 FY09 FY10
Standalone EBITDA
Actis acquired 23% stake in Paras Pharmaceuticals while Sequoia Capital acquired 6% stake
Sep 2006 May 2008 Dec 2010
Actis and Sequoia acquire additional stake to take total PE stake to 70%
Reckitt Benckiser acquires 100% stake in Paras Pharmaceuticals
Feb 2012
Marico acquires Paras personal care brands
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Paras – Classic Case of Transformation
Market leader
Established market leading brands in a niche and fast growing market
Moov, the No 2 topical analgesic pain ointment
D’Cold, the No 2 cold & flu remedy
Dermicool, the No 2 for prickly heat
Krack, the No 1 medicated skin treatment for cracked heels
Ability to compete with global companies and create successful new brands
International expansion
Consistent track record of financial performance and returns
Sales growth
Strong EBITDA margins of 27%
Induction of professional managers which brought in scale and efficiencies in the business
Value creation
Strategic sale at huge premiums
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4 SECTION Aurum View
Strictly Confidential
Private Equity is an important source of capital in India’s growth story
Provider of long term financial and strategic capital (Corporate Governance)
Private Equity investment are potentially intended to benefit all stakeholders by transforming investee companies:
Creating a market leading position that is professionally run and success is based on a Innovative business model
However certain critical aspects need greater evaluation to ensure value to all stakeholders:
Investor profile & experience
Track record of Company growth
Control
Valuations
Investor holding period
Exit philosophy
Aurum Views
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Strictly Confidential
Thank You
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Gautam Dhawan
Partner
Aurum Equity Partners LLP
Tel: +91 124 4424470
Mob: +91 98101 97838
Email: gautamdhawan@aurumequity.com
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