Outlook Business

March 2, 2013 40 www.outlookbusiness.com

Think beyond. Stay ahead.

PRIVATE EQUITY Q SSPECIAL PECIAL

WAITING GAME A NUMBER OF PRIVATE EQUITY INVESTORS ARE STUCK IN THE MIDDLE, STRUGGLING TO FIND PROFITABLE EXITS. CAN THEY FIND BUYERS FAST ENOUGH?

March 2, 2013-new.indd 1

10/02/13 6:01 AM

| EDITOR’S NOTE |

Payback time Warren Buffett once famously remarked, “Only when the tide goes out do you discover who’s been swimming naked.” The legendary investor was speaking in the context of equity investing, but it is as applicable to all investments made during a time of plenty. While many a deal in the private equity space has delivered an excellent return, several have gone awry as well. During the 2007 boom, the industry saw its share of irrational exuberance. The usual sins followed: too much capital chasing few good businesses and heightened optimism leading to distorted fair values and rosy forecasts. Predictably, the outcome has been not so pleasing. Many private equity investors are now desperately looking for buyers for their investee companies. The pain is more acute as many funds are nearing the end of their fundlife without having shown a decent return. In our cover story that starts on page 64, associate editor Kripa Mahalingam writes about the challenging times faced by private equity investors today. But like all proverbial clouds, this too has its silver lining. Even as some investors are busy placating their principals, there are others who have let go of creature comforts to venture out on their own. Backed by a track record, they have raised a fairly decent corpus and are busy deploying it.

In other stories, we have a take on Marico’s decision to spin-off Kaya. It seemed like a great idea when Marico decided to enter the skincare business many years ago. After all, vanity is recession-proof and the young and the indulgent were expected to play ball. But the bottom-line has not played out as planned. After constant nudging from institutional shareholders, promoter Harsh Mariwala has finally cut Kaya loose. The story on whether Kaya will exhibit radiance from now is on page 38. Another interesting piece is on the rising popularity of western musical instruments. Guitar, drums and synthesisers are replacing sitar, tabla and harmonium. While it’s sad to see the slow death of Indian classical music, the market for western instruments is growing by leaps and bounds. Find out on page 30 which companies are making merry.

N MAHALAKSHMI

www.outlookbusiness.com | email: [email protected] Outlook BUSINESS / 2 March 2013

1

Contents

Volume 8, Issue 5, March 2, 2013 | Released on stands on February 16, 2013

COVER STORY

Show me the money 64 2

They made a grand entry during the boom. But now, many private equity funds are finding it difficult to get buyers for their investments The second coming

Even as older players struggle, a few private equity veterans have started their own funds

10 Think Beyond. Stay Ahead. First in, first out sums up media maven Ronnie Screwvala’s strategy. But that’s in hindsight, he says

REGULARS 6 Imagenation: Kamal Haasan’s Vishwaroopam saw as much, if not more, action off-screen as on it

Guest commentary

Srivatsa Krishna

Refreshing Brews

Tulsi Honey Chamomile e

Tulsi Green Tea - Lemon Ginger

Exot ic Flavours! Tulsi Green Tea - Pomegranate

For product availability, pls. Contact: [email protected]

2 March 2013 / Outlook BUSINESS

16 View: Rishikesha Krishnan on how companies should target MSMEs in a highly fragmented market 22 Graphically speaking: While the e-commerce business is booming across the globe, the Indian market is yet to see that level of traction

Enterprise

25

Markets

53

54 Debate: Will the FY14 Budget be a market-friendly one? 56 Trend: Is the Sensex headed for a deeper correction?

30 26 The big idea: Freshdesk makes it easier for companies to connect with customers through social media 30 Emerging business: How GenY is driving the demand for western musical instruments in India

58

Strategy

89

35

36 Trend: Will the current tariff hike aid telecom operators in improving their financial condition? 38 Corporate: Marico has spun-off its loss-making skincare business. Can Kaya succeed on its own? 42 Marketing: The market for tablets will take off only when connectivity issues are tackled

38

94 90 The pursuit of happiness: Shailesh Chaturvedi’s passion for football spills over into his work life

BUSINESS OFFICE President: Indranil Roy CFO: Vinodkumar Panicker ADVERTISEMENT Vice President: Pankaj Jayaswal Senior General Manager: Uma Srinivasan (Chennai) General Manager: Kabir Khattar (Corporate) Head Brand and Marketing: Shrutika Dewan Assistant General Manager: Sushil K Menon (Bengaluru) Regional Managers: Prashanth Nair (West), Shipra Mohan Sinha (North) Senior Managers: James V Jose (East), Tusharkanti Ghosh (West) Managers: P S Sudharshan, Suneel Raju CIRCULATION National Heads: L Arokia Raj (Circulation) Himanshu Pandey (Subs & Biz Dev) General Manager: BS Johar (Subs) Assistant General Managers: Anindya Banerjee (West), G Ramesh (South) Zonal Sales Manager: Vinod Kumar (North) Manager: Vinod Joshi Deputy Manager: Shekhar Suvarna PRODUCTION Chief Manager: Shashank Dixit Senior Managers: Deshraj Jaswal, Shekhar Pandey Associate Manager: Jayesh Gaikar ACCOUNTS Senior General Manager (F&A): Satish Raghavan Manager: Diwan Singh Bisht ADMINISTRATION Assistant General Manager: Rajendra Kurup MENTOR: MAHESHWER PERI

94 The good life: As an Indian artist, Sakti Burman’s popularity is not bound by boundaries; his fan base extends to France as well 96 High five: Kroll Advisory Solutions’ Reshmi Khurana on how to detect potential fraud in an organisation COVER ILLUSTRATION: SAAHIL BHATIA

2 March 2013 / Outlook BUSINESS

Editor: N Mahalakshmi Deputy Editors: Meenakshi Radhakrishnan-Swami, Rajesh Padmashali, V Keshavdev FEATURES Associate Editors: Kandula Subramaniam, Kripa Mahalingam, Krishna Gopalan, Vikas Kumar Assistant Editors: Rashmi K Pratap, Taneesha Kulshrestha Special Correspondent: Shabana Hussain Correspondent: Himanshu Kakkar COPY DESK Associate Editor: Lalitha Sridhar Sub-Editor: Adit Mathai Trainee Sub-Editors: Aditi Saxena, Ravina Kothari ART Deputy Design Editor: Manish Marwah Senior Designer: Kishore Das PHOTO Photo Editor: Soumik Kar Chief Photographer: Bhupinder Singh Principal Photographer: RA Chandroo Senior Photographers: Tushar Mane, Vishal Koul Photo Researcher: Raman Pruthi Consultant: Rashmi Shinde EDITORIAL CHAIRMAN: VINOD MEHTA

58 Investing: Why investors continue to be weary of GVK Power

C’est la vie 4

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HEAD OFFICE AB-10, Safdarjung Enclave, New Delhi 110029; Tel: (011) 33505500; Fax: (011) 26191420 Customer Care: (011) 33505533, 33505536, 33505537, 33505562, 33505653, 33505667, 33505607 Fax: (011) 26191420 Mumbai: (022) 33545000, Fax: (022) 33545100; Kolkata: (033) 33545400, Fax: (033) 22823593, Chennai: (044) 33506300, Fax: (044) 28582250, Bangalore: (080) 33236100, Fax: (080) 25582810; Hyderabad: (040) 23371144, 23375776, Fax: (040) 23375676 Printed and published by Maheshwer Peri on behalf of Outlook Publishing (India) Pvt. Ltd. Editor: N Mahalakshmi. Printed at Print House India Pvt. Ltd., R-847/2.T.T.C MIDC, Rabale, Navi Mumbai- 400 701 and published from AB-10 Safdarjung Enclave, New Delhi 110029 Published for February 17-March 2, 2013 Total number of pages: 96 + cover

| IMAGENATION |

Drama in real life The action, suspense and dialogue delivery happened outside the theatres this past month in Tamil Nadu. Kamal Haasan’s Vishwaroopam was finally released in theatres in the state on February 7, and fans thronged even 5 am shows — apparently, tickets are sold out for all shows in all theatres for the next 10 days. Originally scheduled for a January 25 release, Vishwaroopam was delayed after theatre owners threatened to boycott it if Haasan released the film first on the direct-to-home (DTH) platform. He had just about backtracked when the state government banned the movie, following protests from some religious groups. Political conspiracies were hinted at and Haasan switched effortlessly from threats to emotional appeals — he would leave India in self-imposed exile, he warned, before mentioning how he was on the verge of bankruptcy over the movie — even as he went to court over the government’s decision. The happy ending came after seven “minor” cuts were agreed to after a meeting between Haasan and the groups.

Photo by RA Chandroo

6

2 March 2013 / Outlook BUSINESS

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Outlook BUSINESS / 2 March 2013

| VOICES |

“Flexible inflation targeting “Fl has ha proven to be the most effective monetary policy e framework thus far —Ma Carney, Bank of England’s —Mark go governor-in-waiting, supporting Britain’s policy of focusing on inflation

“One of the key parts of it is just making sure that part of the culture remains intact

8

—Howard Buffett, son of Warren Buffett, in a Bloomberg interview on his preparation to take over as chairman of Berkshire Hathaway

“Having more powers would have helped, although when you deal with fraud, you never know —Mario Draghi, ECB president, defending lax supervision (when he was Bank of Italy governor) at the scandal-hit Monte dei Paschi, Italy’s third-largest bank

2 March 2013 / Outlook BUSINESS

“Everything that refers to me is not right, except for some things —Mariano Rajoy, prime minister, Spain, rejecting allegations in the media that leaders from his Popular Party received payments from a slush fund

“I am confident we are making the right decisions to position Dell —Michael Dell, founder, Dell, reassuring customers that his decision to take the company private is in good faith and has been well thought through

Think beyond. Stay ahead. | RONNIE SCREWVALA, FOUNDER, UTV |

“STAYING THE COURSE IS REALLY THE KEY TO SUCCESS” DREAM MERCHANTS CAN SUCCEED ONLY IF THEIR CREATIVITY IS BACKED BY A SOUND BUSINESS PROPOSITION, SAYS THE MEDIA MOGUL 10

E

ntering the media business was not a visionary thought that emerged early in my life. After my B.Com, I found myself at the same crossroad many of us do — should I create something new as an entrepreneur or proceed with a professional career? Those days, for a commerce graduate, chartered accountancy and MBA were prized possessions. Instead, I chose to go along a path I was already treading in some way — as a student, I had done a lot of theatre and voice-overs for commercials. But media meant just Doordarshan while film was a completely different world. There was zero inclination towards the media business but, thanks to my exposure to media and my confidence — theatre gives you tremendous confidence and frees you of inhibitions — there came about the idea of cable television. In 1981, people all over the world had multiple choices for television channels and here we had just Doordarshan. When I talked about my idea of having an alternative channel, everyone said, “Fantastic idea, but we can’t do anything about it.” Nobody had the concept of satellite television — not even in the West, really — so anything you did in this sector would be a first. My breakthrough was the idea of offering video entertainment for our building. The society agreed and by default, I was a pioneer.

2 March 2013 / Outlook BUSINESS

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PHOTOGRAPHS BY SOUMIK KAR

Outlook BUSINESS / 2 March 2013

| THINK BEYOND. STAY AHEAD. |

But it was tough because it’s a completely non-trodden path. I had no seed capital to expand — you sold the concept to the building and if more than 30 % of the residents paid you in advance for the year, you had the working capital to start and install the CCTV in their houses. For an entire year, all we did was make demonstrations to all the large hotel chains and to about 300 - 400 building co-operative societies in Mumbai. We offered three hours of programming operating through a control room the residential complex would give us. The cable business was a good learning curve. But honestly, although I was the pioneer, I had no vision. The biggest evidence of this is the fact that before I started UTV in 1990, I started a toothbrush company! When you’re starting up as an entrepreneur, you need to be opportunistic. Toothbrushes, for me, was opportunistic. It was an idea that occurred on a holiday with my father, who was working with a multinational called Smith & Nephew, which made Nivea cream and Wisdom toothbrushes. At the UK plant, a brand new looking automatic toothbrush-manufacturing machine had

12

If you don’t capitalise on learnings from your failures, it is a complete waste been set aside as scrap. We imported it and set up a manufacturing unit in India after getting positive feedback from the Colgate-Palmolive senior management. It could not make toothbrushes — the category was reserved for small scale industries — and so I got the opportunity to enter the business. Ultimately, when we took a strategic call to focus on the media business, we sold that business. But it was only in 2000 that I realised that media and entertainment was a bigger value creator than B2B contract manufacturing of toothbrushes. Coming back to the cable business, about six years after I started it, the space got extremely crowded. The challenge in India is the herd mentality. When you drive on Indian roads, you first look at how five people around are driving and take your cues from them. Extrapolate that analogy to business and it fits to a T. Trouble is, not everyone comes in with the same philosophy — there will be entrants who will spoil the market by offering a lower price or whatever else and the economics of the business will change. So when I saw crowding, I decided 2 March 2013 / Outlook BUSINESS

to move out of the cable business and instead focus on content creation.

AN ALTERNATIVE PATH In 1992 , Zee TV had already started and was looking for content and programming. But Subhash Chandra wanted it at the lowest cost because he had paid a fat satellite fee to Li Ka-shing. He wanted to minimise his risk so he was willing to experiment with creativity, but at the lowest cost. We got a 550 -episode contract and that’s when UTV scaled up dramatically. It was the Zee engagement that actually drove home to me that you need to have the highest level of creativity but, if it is not matched with business sense, it’s completely esoteric. That balance now runs in the DNA of the organisation. You need to be dream merchants, but you have to build that into a viable business proposition to go forward. I realised early on that you needed very deep pockets in the broadcast business because, outside of Zee, everyone else was a multinational. As a fi rst-generation entrepreneur with nothing to fall back on, the big question was, could we fund the business in a manner that did not dilute our equity to the extent the company ultimately ceased to be ours? Equity was the only option because banks did not understand the media business and, therefore, did not lend. We didn’t have deep enough pockets, so we focused instead on content. We created a large postproduction studio and started making ad commercials, airline in-flight programming, animation and so on, apart from producing several television programs. But all of that was at the whim and fancy of our customers because we were in a B2B business. It was important for us to control our own destiny, so we decided to create B2C businesses. The large picture in front of us was the movie industry, which we did not fully understand. But we knew from our TV experience that the younger generation was looking for something different, even though they were also happy enough with what was there. A whole set of young directors and writers were also looking for opportunities from the same prism. So it was a simple, straightforward entry into movies, thinking, “Let’s grow this one step at a time.” Our first film Dil Ke Jharoke Mein proved a dud, and the traction in the business came with our co-production ventures: Shah Rukh Khan for Chalte Chalte, Ashutosh Gowariker for Swades and with Hrithik Roshan and Farhan Akhtar for Lakshya.

| THINK BEYOND. STAY AHEAD. |

14

Many people would have got out of the business after that fi rst failure. But that was not part of our DNA — wherever we’ve not done well, we’ve come back with a vengeance. Because if you don’t capitalise on learnings from your failures, it is a complete waste. Staying the course is really the key to success in any business. It’s also important to do your homework diligently. Often, there is a perception that films is a risky business. It isn’t — it’s just like any other business if you do the right analysis. We go through tonnes of feasibility reports. We look at the pedigree of the director, the concept, the genre and so on. The other 50% is about timing, date of release, marketing, positioning, brand and so on. There is no secret sauce for success but your research. It was our research that showed us the way to broadcasting also. We knew we had lost the general entertainment channel game initially and playing catch-up required deep pockets. Our approach would have to be different to effectively compete against large multinationals. Our research while doing Shaka Laka Boom Boom showed kids were desperately looking for local content. So while Cartoon Network, Pogo and Nickelodeon Disney with their 10,000 hours of programming and deep pockets were already entrenched in the kids’ channel space, there was still a gap we could fill. So we started Hungama and in 18 months, became the No.1 kids’ channel. That’s when Disney approached us and we stuck a good partnership and took the company to great heights. Instead of dividing UTV into the three parts we wanted to grow — movies, broadcasting and gaming and new media — we decided to consolidate, allow Disney to increase their holding and infuse capital. I was happy to do that because for me growing the company was important. Promoters in India are obsessed with 51% and control. I crossed that bridge way, way back. I was a shareholder and the value of my shares would increase with everything one did right for the company. Now, if you think as a 60% shareholder in a company you are the owner, you have a big problem. The defi nition of ownership is 100%. If you think differently, you are not going to create value for the shareholders and the company.

BEYOND BUSINESS It would be wrong for me to say that the decision to fi nally exit the company was based solely on business need alone. It was also about how I viewed the next 25 years of my life and what I wanted to do. Very early in my career, we had started an NGO called Share, driven 2 March 2013 / Outlook BUSINESS

by the thought that about 10 % of whatever we made every year should go to charity. Once we listed, we ensured Share was separated from UTV; it become my personal engagement. Over the past five-seven years, we’ve been active in rural India, especially in Raigarh and Ratnagiri districts in Maharashtra, improving access to water. We are now looking to create a model that is scalable, but for that one needs substantial resources. Of course, we’ll still raise more funds. If I could convince Disney, which came to buy Hungama, to buy the entire company, I’m sure I can convince philanthropists around the world to put money in a good cause. As an entrepreneur, that’s what I bring to the table and that’s my calling right now. I am also looking at seeding entrepreneurs. If we can’t take entrepreneurship to the next level over the next 15 20 years, we won’t be able to progress as a nation. I believe opportunities exist in non-glamorous sectors and that’s where I would like to add value with budding entrepreneurs, by building scale, brand and value.

The best way to handle crisis is to fastforward to your worst case situation. Align yourself to that At the end of it all, what is essential for entrepreneurs is staying the course. You’ve got to be able to constantly ask yourself, “What have I got to lose?” In fact, the best way to handle crisis is to fast-forward to your worst case situation. Align yourself to that. If you can live with that, everything else is doable. I started with #37,500. What’s my worst-case situation? I’ll go back to #37,500 and it’s not that petrifying. My ability and my confidence will restart because, as difficult as it may sound, it’s not insurmountable. Looking back, it may seem I have always planned my exits. But that’s a false way to start. If you start Day one in a job with a view to hand over in two years’ time to somebody else, imagine your performance. You’ll never have any clarity of role. You’ll never be a leader. Also, success leads to complacency. Don’t take anything for granted and instead say, “Let’s move on.” That can be quite rattling for many team members but for me, it’s been a good formula. Remember, life can be very fickle and transient. So stay grounded. b

view | STRATEGY |

RISHIKESHA T KRISHNAN Visiting fellow, ISB, and Professor, IIM Bengaluru

The gap unfilled WHY COMPANIES STILL STRUGGLE TO FIND APPROPRIATE PRODUCTS FOR MSMES

N

16

o one is sure of their exact number, but a census of micro, small and medium enterprises (MSME s) done a few years ago estimated that there are 26 million small and medium enterprises in India. It is well known that this market is fragmented and price-sensitive and, hence, large companies have tried to tailor products and services to target this market. But, is that enough? Take a look at the case studies below and see for yourself. MSMEs often complain that they don’t have adequate access to fi nancing. One reason for this is that banks and financial institutions find it expensive and difficult to do a thorough analysis of a small fi rm’s credit-worthiness. Seven years ago, Crisil, India’s premier rating agency, stepped in to address this problem. The challenge was that any credit-worthiness assessment had to be completed within a reasonable period of time, maintain Crisil’s standards of analysis, and yet be affordable. Crisil launched SME ratings in 2005. It created a network of qualified individuals in more than 180 cities, who were given intense training based on a speciallydeveloped methodology, and had to meet rigorous certification requirements. This network of trained professionals became the bedrock of the SME rating system. To attract these individuals who are not formal employees of Crisil, the company even brought their parents to the Crisil office to show them that the company was solid and that this could be a career option. Reputed chartered accountancy firms with an all-India reach were hired for verification and oversight. The rating was based on a simple, two-dimensional VISHAL KOUL

2 March 2013 / Outlook BUSINESS

scale of performance capability (five categories) and financial strength (two categories). Once all the data is collected, technology is used to complete a rating in a few days. Overall, the rating is completed within about a month. With this process in place, Crisil is able to do about 10,000 SME ratings a year, making it the largest SME rating agency in the world. With a credit rating, an SME can get better access to bank finance and, sometimes, even lower interest rates. However, even with these benefits, the #50,000 -1 lakh price tag was found to be too expensive by many SMEs. So, in spite of the well-designed product, and the business and process innovation that Crisil introduced to make the rating product accessible, the government had to step in to provide a subsidy for those MSMEs who couldn’t afford it. But, pricing is not the only barrier to adoption of new products by MSMEs. In 2007, India’s

view | STRATEGY |

18

largest IT services company, Tata Consultancy Services, identified SMEs as an important segment. But since it lacked adequate experience in working with SME s, the company met with more than 250 organisations to understand how they use technology. TCS found that SME s had made significant investments in devices and hardware, including networking, and used their computers mainly for accounts and inventory. But MSME owners complained that the reports they generated didn’t reflect actual performance because there were islands of data that were not integrated with each other. Others reported that they struggled to keep up with technology changes, keep their systems virus-free, and to hire and retain staff for IT. Even evaluating offers made by vendors was a tricky task. Based on these customer inputs, TCS saw an opportunity to take responsibility for running SMEs’ IT, based on some basic principles such as covering all key business processes and providing for all statutory compliances. To avoid fresh capital expenditure, the company provided an operating expenditurebased service. The resultant TCS cloud-based solution, TCS iON, was launched in the market in March 2011. iON is periodically upgraded by TCS , but the user doesn’t have to do anything extra at his end. Though iON is available across six verticals, in the first year and a half TCS had only about 300 installations, with the largest concentration in the education space, apparently much less than what the company hoped to achieve. At the other end of the spectrum is Tally, arguably the most successful product ever built for MSMEs in India. It is estimated to be in use by about two million users although less than one million users have purchased licences. Right from the beginning Tally was built with Indian users in mind — it used minimum hardware resources, and was tailored to Indian accounting practices. Even novice users were able to quickly learn how to use the product and it rapidly gained a large installed base of users, thereby creating a platform for the positive returns of network economics. Tally worked closely with hundreds of institutes across the country to impart training and thus create a base of accountants with Tally skills. Early on, Tally created good relationships with the chartered accountants community. With its huge installed base, Tally has become a basic requirement for any accountant in India — if you don’t know how to use Tally, you can’t be a practising chartered accountant!

To address the piracy issue, Tally reduced its prices substantially a few years ago. The product has also kept up with changes in technology and applications — it was very quick in providing VAT functionality after the law changed; it is available on the cloud; and the product today addresses much more than just accounting, it has become more like an ERP software. Of course, Tally’s success was also the result of some historical factors such as the decision of the Income Tax department and the Department of Company Affairs to make e-fi ling compulsory. Not all companies will have this path-dependent advantage.

THE FORMULA FOR SUCCESS So, what does it take to innovate for the SME market? Recently, a senior industry executive told me that the key to meeting the needs of the MSME market is realising that it is more like the enterprise market of the West than the consumer-like Small Office Home Office (So-Ho) market. Early adopters in the MSME market are very small in number and crossing the chasm to a larger “technology acceptor” market is very difficult. Many “technology acceptors” are reluctant to buy a new product even when they see a business case for it because they have had bad experiences in the past with products that were pushed to them with exaggerated promises, at high prices, and with limited post-sales support. Overcoming this trust deficit that has been created is the biggest barrier to innovating for the MSME market. Innovation may be the solution to this problem as well. i SPIRT, a think tank recently launched by software product companies, is creating iSMB to be a market maker for software products in the MSME community. iSMB will bring out product guides for important segments of the MSME sector so that they can make informed choices regarding the soft ware products that suit them. They will also certify products and encourage product companies to create visible dispute settlement mechanisms. So, the key to innovating for the MSME market is not only tailoring products to their needs at easily affordable price points, and updating them to adapt to evolving use needs as Tally has successfully demonstrated, but providing effective ways of bridging information gaps, establishing and communicating a clear business value proposition and lowering the risk of purchase by the customer. b

Overcoming the trust deficit between technology acceptor and new product is the biggest barrier to innovating for the MSME market

2 March 2013 / Outlook BUSINESS

| GRAPHICALLY SPEAKING |

The e-tail r Powered by private equity investors, e-commerce in India will grow manifold India’s internet story is still in its infancy with a market size of just $600 million, but the signs are encouraging. The country has seen a rapid rise in the number of web-based retailers with Flipkart, Quikr and Snapdeal dominating the favourite buttons. The e-

commerce market, according to a report by Edelweiss, is estimated to grow to $12 billion by 2016. This is largely on the back of private equity investments that will power these websites (estimated $8.9 billion in 2012, according to media reports). Advertising, a key reve-

nue generator, is set to rise to $800 million by 2016. However, some experts believe India is in the midst of an e-tail bubble with very few e-commerce websites being able to break even, let alone generate profits. For now, the race is on to assimilate new customers.

At little over half a billion, the Indian e-commerce market is a fraction of developed markets

$

55bn

22

$

0.6bn INDIA

CHINA

More than 75% of users use the internet to buy and sell goods and services

The domestic e-commerce market is estimated to grow over four times by 2016

in %

market size ($ billion) *Estimate

11.8

95 76 74

69

62 61 59 57 54 51

6.7 4.3 2.5

E-mailing Search Info Download Job Social Search Messaging/ PC to Pay or buy search music search net- or buy chatting mobile bills non-travel working travel SMS products products 2 March 2013 / Outlook BUSINESS

0.4

0.6

2010

2011

1.3 2012*

2013*

2014*

2015*

2016*

revolution 267bn

$

$

166 bn

23

US

EUROPE

Venture and private equity deals in the e-commerce space have accelerated DATE

INVESTEE

INVESTOR

MONEY RAISED ($ MILLION)

BUSINESS

Sep-11

Softbank

200

Mobile ad network

Nov-11

Norwest Venture Partners, Intel Capital. Sequoia Capital India and Nokia Growth Partners

40

Group discount

Sep-11

Concur

40

Online travel

Jul-11

Bessemer, NVP and IndoUS Venture Partners

40

Group discount

Jul-11

Tiger Global

20

Online retailer (books)

Source: Edelweiss

Outlook BUSINESS / 2 March 2013

| FOREIGN POSTS |

LISTEN, TIM

Hey, how about Moody’s? 24

Looks like Standard & Poor’s is paying the price for downgrading Uncle Sam’s AAA credit rating in August 2011. Though S&P sacked its then president, Deven Sharma, who was at the forefront of the downgrade, that wasn’t enough to mend fences with the Obama administration. Call it vendetta or poetic justice, now the government through the US Justice Department has slapped a $5 billion suit on S&P for misrepresenting financial risk in 2007 by knowingly retaining triple-A ratings for mortgagebased securities even as the housing market collapsed. S&P’s parent McGraw-Hill is already bearing the brunt — its shares have plunged 27% since the suit was filed.

David Einhorn of Greenlight Capital is doing what he does best — forcing managements to get investor friendly. His current grouse: Apple’s refusal to pass on more cash — from its $137 billion hoard — to investors through issuance of preferred stock. Apple on its part wants to return cash through an increased dividend and buybacks. His meeting Tim Cook did give the stock a boost, but not enough for Apple to regain the crown of the world’s most valuable company.

RIM NO, BB YES

SELF DELETION There is no bigger delusion than to believe that your online secrets are safe. For those who would like to cling on to that fantasy, Snapchat is the app to have, especially to safeguard their drunken postings. A selfdestructing message timer means that your moronic social media outburst or an indiscreet upload will not cross the path of a potential recruiter. Co-founders Evan Spiegel & Bobby Murphy have a good thing going and investors are now throwing money at them. Alright, let’s deal with those messy hackers and Mark…stop poking, will you? 2 March 2013 / Outlook BUSINESS

Research in Motion (RIM), known for its BlackBerry range of smartphones, is looking at all options to stay relevant. RIM, which just launched its Z10 series phones, has changed its name to BlackBerry. But the company whose third-quarter profit fell 96% to $9 million and revenues halved to $2.73 billion needs more than just a name change. Now, only if those guys at Lenovo make their mind up quickly.

enterprise EMERGING BUSINESS Western musical instruments are the new fashion accessory for India’s youth THE BIG IDEA Freshdesk enables companies to address customer grievances on traditional as well as new media

| JUST STARTED |

WHERE’S THE PARTY TONIGHT? Got a baby shower and need a “Mom to be” sash? How about a “I am single, kiss me” badge for a bachelorette night? There was a time when parties meant balloons, buntings and food — and that, too, only for toddlers. Now, the urban youth of the country have a new trend — theme parties. Bollywood, Halloween, cartoon, Hawaii, patriotic, hippie… you name it and someone has already done that some weekend night. So, where do you go for theme-based supplies? Ekta Ballani suggests her shop, Madcaps. Launched last October, just in time for Halloween, in Mumbai, the tiny decorated store is a family enterprise for the former telecom marketing executive and her husband Manish. The founders usually head to Europe to handpick props for their clientele, which includes a large number of expats and the young and wealthy. An online version of the store is already in the pipeline and more stores will be launched in Delhi and Pune, once Madcaps proves itself a sane business idea. b —ADITI SAXENA

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SOUMIK KAR

Name

Started

Initial investment

Price range

Monthly sales

Madcaps

October 2012

#3 crore

#49-3,000

#3 lakh

and upward Outlook BUSINESS / 2 March 2013

enterprise | THE BIG IDEA |

DELIGHTING CUSTO WITH ITS CLOUD-BASED OFFERING, FRESHDESK HELPS ITS CLIENTS ADDRESS CUSTOMER Kripa Mahalingam

“We don’t have white papers — we make online demos and offer free 30-day trials —GIRISH MATHRUBOOTHAM Co-founder & CEO

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2 March 2013 / Outlook BUSINESS

OMERS I ISSUES PROMPTLY

deas can come from anywhere. Sometimes it could be staring you right in the face for years and you may not see it. Luckily for Girish Mathrubootham, his eureka moment happened by accident. In mid-2010, the techie was browsing through Hacker News, a web community for geeks, where he read that online customer support company Zendesk had increased its rates by 60 -300%, leaving its

Year of incorporation

2010 No. of customers

“We

were the first one to integrate social media with traditional media —SHAN KRISHNASAMY Co-founder & CTO

2,800 Major competitors

Zendesk and Desk Investment #50

lakh

customers very unhappy. One irate customer had remarked that there was a huge opening in the market for someone with a product at the right price. “It was like a slap on my face for not seeing the business opportunity in customer support, especially since I had been building on-premise helpdesk systems since 2004 at Zoho,” recalls 37-year-old Mathrubootham, who was a vice-president at the Chennai-based customer relationship management (CRM) software company at the time. Over the next couple of weeks, Mathrubootham researched the companies in the space and took the usual, tech route to entrepreneurship — zeroed in on the domain name, roped in a co-founder (Shan Krishnasamy) and then quit his regular job. Freshdesk — a B2B cloud-based helpdesk software that allows organisations to support their customers over e-mail, phone, website and social media — started in October 2010 in a rented conference room of a friend’s company with an investment of #50 lakh bootstrapped by Mathrubootham. Given the founders’ background, it was easy to zero in on product features and functionality and what platform it should be based on. “We decided to build a cloudbased offering because one, there weren’t many cloud-based systems in the market. Two, our experience at Zoho convinced us that everybody will move to the cloud in the future,” points out Shan Krishnasamy, chief technology officer, Freshdesk. “The economics of the cloud is proven. The resistance to

RA CHANDROO

Outlook BUSINESS / 2 March 2013

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enterprise | THE BIG IDEA |

28

change is what is blocking people from going on the cloud and that will change.” Freshdesk started testing its product in April 2011 by inviting customers through Google ads, LinkedIn and Facebook to try its product, besides posting a blog on Hacker News (Yes, Girish swears by it). The response was encouraging — nearly 150 people signed up for the product. More importantly, customers got back with details on what they wanted from a customer support system. It also gave the start-up insights into the small and medium customer segment. In June 2011, Freshdesk was formally launched, after all chinks had been ironed out following customer feedback on the beta version. Within just two days, Freshdesk had its first paying customer, from Australia. “We changed the game by doing all our marketing on the internet. We don’t have white papers — we make online demos and offer customers free 30 -day trials of the product,” says Mathrubootham. Even today, the company offers a freemium model where the first agent can sign up for free. (In this model, the company lets the first agent in any organisation use the product for free and charges subsequent users.) The company currently has around 2,800 customers, including Dell,

“If they could build a world

class product using India as an advantage, they could give a fight in the market —SHEKHAR KIRANI Partner, Accel Partners

or Facebook into a ticket that the company needs to respond to. “We were the first to integrate social media with traditional media because companies want to go where customers are,” says Krishnasamy. Every ticket is routed to a team inbox where the query can be assigned a support agent who then resolves the query. The responses are posted directly on Twitter and Facebook. Besides measuring the time spent on each ticket, the platform gives analytical insights that help fix recurring customer problems. Freshdesk also helps companies create self-service portals where customers can get their que-

Within months of testing its product, Freshdesk was able to secure over $6 million as funding from VCs MakeMyTrip, Naukri, Pearson and Toshiba, managed by a 65 -member team based out of Chennai. So, what does the software do? Essentially, it integrates traditional support channels such as phone and e-mail with social channels such as Twitter and Facebook. The software converts an e-mail interaction or a complaint on Twitter 2 March 2013 / Outlook BUSINESS

ries answered before e-mailing the support staff. It can be branded and customised to fit the company’s existing website. Pricing is based on the services provided — support only through e-mail and phone, for instance, versus a plan that includes social media support — and the number of customer-supporting agents.

The services offer range from $9 to $49 per agent per month. So, if an organisation chooses the $9 plan, for instance, and has five agents, it will pay $45 a month. Freshdesk has also created a software development kit for iPhone app developers to help improve customer support. There is even an in-house gamified help desk that converts tickets into a chance for agents to win points, earning them badges and putting the fun back into customer support.

INVESTORS’ DELIGHT Unlike most start-ups, for Freshdesk finding investors was just as easy as finding customers. In early 2011, the company listed itself on Angel List, a platform for startups and investors to come together. In June 2011, the first validation of the business model came when Freshdesk won the Microsoft Biz Spark India Start up challenge, beating over 400 companies to win $40,000. It was right about then that the team at Accel Partners, a venture capital fund, decided to invest in Freshdesk. “From a VC investible perspective, most of the ingredients were already there. Girish and Shan had already built scalable platforms and businesses, so they knew how to do it. The question was whether there truly was a large global market they could go after,” says Shekhar Kirani, partner at Accel Partners. The firm decided to back Freshdesk and invested $1 million in October 2011. “We felt if they could build a world-class product using India as an advantage, they could give a fight in the market,” says Accel’s Kirani. As business started to scale with 700 customers signing up, the second round of funding came within the next six months with Tiger Global and Accel Partners investing another $5 million together in April 2012. With the experience of two rounds of VC

funding, Mathrubootham offers a word of advice to budding entrepreneurs: don’t take rejection personally. “I have been told by junior analysts that there is no interest in this space,” he recalls. “Once we started doing well, the same people came back saying they want to invest in the company.”

FUTURE’S BRIGHT Tech consultancy Gartner says social CRM is a nearly $1 billion market today and by 2016, it predicts 50% of CRM applications will be web-based and delivered through the cloud. But even as the opportunities ahead seem promising, there is competition to be tackled as well. Leading players include California-based Zendesk, a $30 -million company that serves more than 25,000 customers, and Desk. com, which is part of enterprise cloud computing major Salesforce.

By 2016, it is expected that 50% of the CRM applications will be web-based and delivered through the cloud Neither Freshdesk nor its investors seem to be deterred, though. “B2B is not a winner-takes-all market. As long as you differentiate, and carve your niche in a segment, there is room for good players,” says Mathrubootham. Accel’s Kirani feels the segment Freshdesk operates in puts it on an even wicket with bigger players. “In the SMB market Freshdesk is targeting, people don’t decide without going for a trial. Once Girish gets them on a trial, if his product outshines the others for a given price point and feature set, they will most likely choose him,” he points out. Freshdesk, which is incorporated in the US, doesn’t share rev-

enue figures but says income has grown more than 100 times in 2012. However, sources say that the company has crossed the milliondollar mark in revenues in 2012. Although that is many times lower than Zendesk’s expected revenue for 2014 of $100 million, it means there’s more than enough room for Freshdesk to grow. “If anyone is talking about your company, be it on LinkedIn, Mouthshut or blogs, you should be the first one to know and the first person to respond. That’s the power we want to give companies,” says Mathrubootham. In this age of instant gratification, companies definitely need that kind of power to keep their customers happy. b

- 2 - 8 - % 8 - : )

ICAI International Conference

T

he Institute of Chartered Accountants of India (ICAI), recognizing its role and responsibilities in the changing global economy has been instrumental in providing quality education and continuous professional education to its members. As a part of this endeavor, ICAI hosted its International Conference on the theme “Accountancy Profession: Enablers of Economic growth” from January 23-25, 2013 at Mumbai to dwell deeper into emerging paradigm of accountancy profession and deliberate on issues of emerging significance. The Conference saw participation of over 1100 stakeholders from across the globe. The Conference was inaugurated by Hon’ble Minister of Law & Justice, Dr. Ashwani Kumar in the august presence of CA.Jaydeep Narendra Shah, President, ICAI & CA.Subodh Kumar Agrawal, Vice-President, ICAI. The Conference was an assimilation of learned resources in areas of Governance, Financial Engineering, Regulatory Compliance, Corporate Social Responsibility, Emerging Paradigms of Technical Standards and related issues out of current and emerging context. The Conference dwelled upon many important topics of economic relevance. Some of the major thematic issues of the Conference were: qª &NUDQM@MBDªª2TRS@HM@AHKHSXª qª -@UHF@SHMFªSGQNTFGª,@YDª ª1N@CL@OªENQª&QNVSG qª 2G@OHMFªSGDª%TSTQDª ªª$CTB@SDª$MF@FDª$LONVDQªª qª (MCH@ªª ª#HUDQRHjDCª#DL@MCRª,DDSHMFª ROHQ@SHNMRª qª !@MJHMFª2DBSNQªlª MBGNQHMFª&QNVSGª#HRBHOKHMDCª OOQN@BG

CA. K.Rahman Khan, Hon’ble Minister for Minority Affairs being presented a memento by CA.Jaydeep Narendra Shah, President, ICAI in the presence of CA.Subodh Kumar Agrawal, Vice-President, ICAI at International Conference.

qª ,NUHMFªSNV@QCRª&KNA@Kª"NMUDQFDMBDª ª(RRTDRª@MCª"G@KKDMFDR qª ,DDSHMFª$WODBS@SHNMRªlª"NMSNTQRªNEª$LDQFHMFª$BNMNLHBª.QCDQª qª "NTMSQXª /DQRODBSHUDª ª /QNEDRRHNM@KHRLª @Rª @ª 3NNKª SNª $BNMNLHBª Growth qª ,NUHMFª SNV@QCRª -DWSª #DB@CDª ª $LAQ@BHMFª "G@MFDª ª 2DHYHMFª .OONQSTMHSHDR Some of the prominent speakers for the Conference were CA. K. Rahman Khan, Minister for Minority Affairs, Shri Piyush Goyal, MP Rajya 2@AG@ª,Q ª2TQDRGª2DM@O@SXª$#ªª"%.ª6HOQNª+SCª,Q ª# ª2@QJ@Qª",#ª 4MHNMª!@MJª,Q ª, & ª2@MFGUHª",#ª2XMCHB@SDª!@MJªADRHCDRªDLHMDMSª International Speakers. n

enterprise | EMERGING BUSINESS |

C I S U M THEIR O T EARS

TS N E RUM I T S T S N A L I ENTER C I S MU S E D T O A S E N R STE IS POI ING PH E W THE DUSTRY T EXCIT IN MOS

30

2 March 2013 / Outlook BUSINESS

Krishna Gopalan

A

t 18, you’d naturally expect Samarth Swarup’s latest indulgence to be a fancy smartphone. Instead, it’s a Yamaha APX700 acoustic guitar. At #40,000, a tidy sum for this Class XII student at the Bhartiya Vidya Bhavan Vidyashram in Jaipur, the Yamaha is one in a line of six guitars and three keyboards Swarup accumulated over the past few years. These, and an amplifier, set him back by a cool #1.25 lakh. “Most of it was my own money,” he says, of the savings he made from tutoring others on the guitar. Evidently, this isn’t just the impulsive splurge of an affluent teenager. Swarup’s collection is for a purpose. Helped by friends, the self-taught musician is working on a solo music album titled Teri Yaadein, and his first single recently released on the internet. People like Swarup make sellers of musical instruments in India happy. Many of them are seriously eyeing a career in music, others are out to have some serious fun. Young and passionate about Western music, they lap up everything from high-end guitars to top-ofthe-line keyboards and drums. And, unlike in the past, they have big brands in the business literally knocking at their doors. For Swarup, the Yamaha Music Square in his city’s Mansarovar locality made the decision a lot easier. He could try out guitars in the store’s sound-proof rooms before making his purchase. “The sound is the most important factor in a guitar and this store had the one I was looking for,” says Swarup.

BITTERSWEET MELODIES Homegrown retailers and global manufacturers like Yamaha, Casio, Roland, Fender and Pearl are tuning in to such customer insights, and ramping up on distribution and marketing. Yamaha, which was previously selling through local importers, opened its first experiential store in 2008. “That year, we decided that India was an important destination and launched the Yamaha Music Square stores,” says Tarun Sehgal, regional manager (west), Yamaha Music India. Today, 17 such outlets mark their presence in second tier cities such as Kochi, Indore, Lucknow, Shillong, Jaipur and Guwahati. SOUMIK KAR

Outlook BUSINESS / 2 March 2013

31

“We didn’t expect Ahmedabad to be a large market until we sold two pianos worth #7 lakh in no time —PHILLIP RODRIGUES MD, Furtados Music

32

Figures for the size of the Indian musical instruments market are hard to come by. That’s not surprising. “This is a very new industry for all of us,” says Anthony Gomes, partner at BX Furtado & Sons in Mumbai, which set up shop 147 years ago. He tells us that Western musical instruments like the piano, keyboard, guitar and drums drive most of the demand now, thanks to a shifting cultural context. “It is the result of MTV and Channel V. Customers are hugely influenced by what they watch,” he says. TechSci Research, a Noida-based market research firm, has estimated this segment at #370 crore in revenues (2011). Not too long ago, the business served a small but informed community of music professionals and students, and margins were

TUSHAR MANE

modest. Things are different now. Brijesh Bhargava, director, Bharagava’s Musik, a leading music distributor and retailer in Mumbai, recalls how a decision, in 1998, to import 300 guitars from China for the firm’s own brand GBA almost blew up in his face. Priced at #3,000 apiece, a princely sum those days, they took a year to sell. “We ultimately made only #40 a piece,” he says ruefully. “Today, we sell about 10 times that number each month, at just about the same price,” says Bhar-

“Sales for Indian

instruments have dropped by 50% a year. People think it’s not cool to be seen with those —BRIJESH BHARGAVA Director, Bharagava’s Musik

SOUMIK KAR

2 March 2013 / Outlook BUSINESS

gava. Falling import duties, from 300% to 60% in 1998 and to 23% now, have made prices affordable. Gomes adds that 90% of products sold such as guitars, keyboards, drums and pianos, are imported from the US, China, Indonesia and Japan, and lowered duties make a huge difference. One could acquire a good guitar for #5,000, a violin for #4,500, and a feature-rich synthesiser keyboard for #10,000. It’s a pie that’s growing but at the cost of Indian instruments. “Sales for Indian instruments have dropped by 50% each year,” says Bhargava. At his western Mumbai outlet, the tabla, flute and harmonium occupy a small portion of products on display. Buyers for these are typically in the 40 -50 year age bracket. A good quality Indian flute costs just #700 while a tabla set comes for #6,500. “People think it’s not cool to be seen with those,” Bhargava explains. No one’s complaining, though. At Furtados Music, the retail enterprise of Furtados Group, revenues have been climbing 25% annually on the back of Western instrument sales, according to managing director Phillip Rodrigues. So who’s buying? Parents looking to gift their children, middle-age professionals seeking to rekindle a long-cherished dream, and hobby-

enterprise | EMERGING BUSINESS |

ists among others. Many are firsttime customers and importantly, they have the money to spare. Rodrigues remembers how a fortysomething couple once walked into his Juhu outlet to buy picks (used to pluck or strum strings) for their son. After browsing around, they bought a piano worth #1.5 lakh.

is clear that parents want their children to learn music,” says Rodrigues. Live music shows too help promote interest, according to Sehgal. “IT hubs such as Bengaluru and Hyderabad are seeing a greater orientation towards music, which is good news,” he says. Sahil Makhija, 30, is a professional musician associated with four

BEYOND EXPECTATIONS If there’s newfound optimism in the industry, it’s mostly due to the opportunity unfolding in small-town India. “The growth

“IT hubs such as Bengaluru and Hyderabad are seeing a greater orientation towards music —TARUN SEHGAL Regional manager (West), Yamaha Music India

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RA CHANDROO

rate in tier 2 cities is higher than in the metros,” affirms Karan Chechi, research director, TechSci Research. Furtados Music is a case in point. Till 2007, it had two stores each in Mumbai and Goa. Since then, it has expanded to Ahmedabad, Mangalore, Dimapur and Ludhiana, among other locations. “We didn’t expect Ahmedabad to be a large market when we opened there last year. In almost no time, we had sold two pianos for #2 lakh and #5 lakh each,” says Rodrigues. Contemporary cinema and television shows have played their part. And backed by higher disposable incomes, music has become an acceptable career choice or at least a creatively satisfying pursuit. “It 2 March 2013 / Outlook BUSINESS

heavy metal bands in Mumbai. As the founder of Demonstealer Records, an independent record label based in Mumbai, he’s often juggling his recording studio, organising bookings for other bands, and drumming up support for the genre. His bands perform in smaller centres like Jalandhar, Anand, Dhanbad and Silchar, where they are popular among young student audiences. Makhija owes his success in large measure to the internet and its role in opening up niche, and sometimes obscure, music genres to young Indians in every corner of the country. Heavy metal requires high-end guitars and drums, which often cost a packet and are not easily available

here, says Makhija. “Duties are very high and we still have to procure instruments from overseas.” But he hopes that’ll change soon. Online retail is picking up, but the bulk of buying continues to take place in the physical stores. “Last year, 10% of our business came from the online channel and this included high-end guitars that cost at least #20,000. That is a big opportunity,” says Rodrigues, who expects online sales to contribute twice as much in the near future.

EVERYONE’S INVITED There’s been little advertising given that the business serves to a limited audience. Instead, community building is the most effective market development tool. Furtados brings in artists from abroad to perform and conduct workshops. It has roped in leading Indian names like Lucky Ali and Usha Uthup for its artiste endorsement programme. “We recently started an ‘Open Mic’ event, where local musicians and singers can perform spontaneously to a live audience. We promote young bands and local music under our Support the Artistes initiative,” says Rodrigues. TechSci’s Chechi sees good times for this industry ahead. “In the next five years, we expect an increase in the number of musicians to boost demand. E-retailing and a rising number of music schools will also be key growth drivers,” he says. Yamaha is replicating its global Music Schools Program, and building partnerships with music schools here. A pilot project in Delhi, Gurgaon, Noida, Chennai and Bengaluru is currently on. Meanwhile, Swarup cannot wait to complete his MBA , by which time he’d have saved enough to acquire his dream guitars — a Gibson Hummingbird (#3 lakh) and a Gibson J-200 (#5 lakh). Who knows, by then, he could buy them for a song. b

strategy TREND Telecom operators have increased their tariffs to improve their financials CORPORATE Will Kaya be able to sustain itself after its spin-off from Marico? MARKETING Is the Indian tablet market ready for hyper growth?

| AD BREAK |

Agency Happy Creative Services

Production house Nirvana Films

Campaign duration 8 weeks

No occasion needed When you’re selling jewellery online, you’ve already got a couple of strikes against you: consumers hesitate making big spends online; and jewellery shopping is usually occasion based, which defeats the unique selling proposition of e-tailing. Online jewellery store Bluestone’s launch campaign acknowledges these truths — and then summarily dismisses them. Told through the everyday banter of a young, (apparently) working couple at home, the ad film offers insights of its own: a woman doesn’t need to wait for “occasions” to buy jewellery; she doesn’t need her husband to buy her something; and online shopping — even for jewellery — is safe and

Length of TVC

convenient. The target audience for this campaign is people who are already shopping for other products online . “We knew we were talking to a younger audience as they would be the first to consider buying jewellery online,” says Kartik Iyer, creative director of Happy Creative Services, the agency behind the commercial. Bluestone’s co-founder Gaurav Kushwaha, explains, “More than jewellery for big occasions, women buy jewellery for daily wear and they need not go to big stores for that and spend a lot.” The ad film suggests making a start by clicking the ‘Buy Now’ button. But will its audience oblige? b —ADITI SAXENA

70 seconds

Language Hinglish

Media TV, digital and social

Outlook BUSINESS / 2 March 2013

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strategy | TREND D|

A TRICKY CALL Will hiking call rates prove a sustainable strategy for telecom operators?

T

iming is everything. For operators negotiating the current Indian telecom quagmire, this seems to be the perfect time for something they’ve been putting off for sometime — increasing call rates. It’s the first time since mid-2009 that effective call rates are going up as telcos start to snip away bonus talk time and discounted recharge vouchers.

36

There are enough reasons why this makes sense now. Competition is far lower. Key players such as Etisalat (in a JV with the Dynamix Balwa group), C Sivasankaran’s S Tel and Loop Telecom (owned by the Ruias of Essar) have exited the business amidst charges of corruption and cancelling of 122 licences across India. Others have scaled down their operations in select circles. Uninor stopped acquiring new subscribers in Kerala, Karnataka, Orissa and Tamil Nadu since August last year after the regulatory uncertainty around fresh auction of spectrum and its pricing impaired the firm’s ability to secure funding for expansion. Videocon shut down operations in 11 circles where the Supreme Court cancelled licences in January 2012. It subsequently won spectrum in five of those circles in the November 2012 auction. From up to 14 operators in some circles during the peak of the telecom boom, the number is down to eight or nine now. 2 March 2013 / Outlook BUSINESS

The purchase of costly spectrum through the November 2012 auction has put the additional pressure of bank loans and interest charges on companies’ groaning finances. Some cite the hike in diesel prices, used to power telecom towers, as another factor. Passing on the burden to customers, therefore, seemed inevitable. Airtel kicked off the hike in January when it reduced free talk time for pre-paid customers by up to 25% and doubled call rates to #2 per minute. Then, Idea hiked its rates from 1.2 paisa to 2 paisa per second, a 67% jump. Vodafone followed suit. Operators say eventu-

Airtel and Idea upped tariff s by 20% in 2011 but rolled back after customers moved to rival networks

ally all circles and subscribers will be covered. But will this improve operators’ bottomlines? “It will lead to a lot of savings for them. The cumulative impact could be 1.5 -2 paise on the average realisation per minute (ARPM),” says Rikesh Parikh, vice-president, equities, Motilal Oswal Securities. Airtel’s ARPM stood at 42.5 paise in Q 3FY13 while for Idea it was 41.1 paise. These numbers stayed unchanged from the previous quarter because call rates had been plummeting though usage was going up. That could change now, says Sahil Aggarwal, analyst at India Ratings. “It will lead to an improvement in operating performance, and partly offset the negative impact of recent regulatory developments,” he says. So far, a handful of circles, including Mumbai and Delhi, have been chosen for the call rate hikes. Raising tariffs in the age of number portability has its risks. Airtel and Idea had upped tariffs by approximately 20% in mid-2011 but had to roll back quickly after customers migrated to rival networks. Almost 99% of India’s mobile market comprises prepaid connections. Millions of these subscribers, weaned on a regime of perpetual discounts and rock-bottom tariffs, will no doubt find the new rates a dampener. But for an industry struggling to emerge from the unprofitable depths it has been driven to, there is not much choice if it has to survive. b —RASHMI K PRATAP

strategy | MARKETING CORPORATE ||

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S

ometime in 2001, a visiting friend from the US suggested Harsh Mariwala buy into a laser hair removal business. “I wasn’t that excited — it’s an easily copied model,” recalls the chairman and managing director of Marico. Expanding the idea to skincare, though, seemed more promising. Recce trips to dermatologists’ clinics and high-end beauty salons in the US and the UK

convinced Mariwala this was an idea worth incubating. Less than a year after his friend’s visit, he opened the first Kaya Skin Clinic at Bandra — the medi-spa combined zen-like interiors, a signature welcome drink and trained staff in designer uniforms with in-house dermatologists and spaceage sounding skincare treatments. Now, Kaya has expanded to 105 clinics across India, West and 2 March 2013 / Outlook BUSINESS

South East Asia. It earned nearly #280 crore last year and is believed

to be the largest recruiter of dermatologists in the country. But the good news ends there. After more than a decade, the business is still to show a full-year profit (it’s just started making a modest quarterly profit). Parent company Marico has incurred a loss of #145 crore on it and has finally thrown in the towel. From April,

Kaya will be demerged from the consumer products business and operate independently as Marico Kaya Enterprises (MaKe). By midJuly, after obtaining all necessary approvals from Sebi, MaKe will be listed on the Bombay Stock Exchange as well as the National Stock Exchange. While Mariwala will continue as CMD of both entities, MaKe will have a separate board. Marico will transfer all its

| CORPORATE |strategy

Makeover MARICO HAS SPUN-OFF ITS BLEEDING SKINCARE BUSINESS. CAN IT DELIVER AS AN INDEPENDENT COMPANY? Adit Mathai

FILE PHOTO

assets and liabilities in Kaya — including capital of #180 crore — to MaKe. After that, it’s on its own. But why has a seemingly good idea failed to take off ? And, more importantly, what will it take for the business to succeed as an independent entity?

Kaya, further adding that high real estate and rental costs added a 6 -7% drag on margins. Mariwala lists another factor: attrition. “Perhaps we also expanded a little too fast,” he adds reflectively. Between 2003 and 2005, Kaya opened 20 outlets across India. It ventured overseas in 2006 and followed that up with a domestic expansion overdrive over the next two years, opening 25 clinics in quick succession in both, metros as well as tier 1 and tier 2 towns such as Nashik, Indore, Coimbatore and Vishakapatnam. (It currently has 83 outlets across India.) The positioning, pricing and brand proposition remained unchanged, though, and customers in smaller towns proved unwilling to pay Kaya’s premium rates. Indeed, expensive services were an issue even in the

More than skin deep Kaya's turnaround after the spin-off depends on continuing the upward trend in same-store growth FY09

FY10

FY11

FY12

FY13 YTD

Turnover (~crore)

157

182

239

279

251

Profit before interest and tax (~crore)

-5.1

-26.6

-24.9

-29.1

2.2

2

-5

2

15

NA

Number of stores

89

101

103

107

105

Revenue per store (~crore)

1.8

1.8

2.3

2.6

3.15

POCK-MARKED PAST You do not have to look far for reasons why Kaya did not click. “The business is cluttered, with unorganised players who do not play by the same rules. This has made it harder to grow the business and increase footfalls and has also dented our profit & loss,” grouses Ajay Pahwa, the outgoing CEO of

big cities. “Customers shell out up to #60,000 for a complete skincare package from Kaya, which is three times more than what competitors charge,” says CK Kumaravel, cofounder and MD of Naturals Beauty Salon, a 202 store and #150 crore turnover-strong South India-based salon and spa chain. Even Kaya’s positioning as a skin “clinic” backfired — customers turned up only for skin problems and didn’t return for routine beauty treatments. Also, because most people don’t want to admit to having skin problems, Kaya didn’t get the benefit of word-of-mouth referrals, a key requirement in this business. “The brand was known more for its skin cure solutions,” agrees Vandana Luthra, founder of beauty, skincare and weight loss chain VLCC. “There was very little

Same-store growth (%)

Source: Company, Axis Capital

Outlook BUSINESS / 2 March 2013

39

strategy | CORPORATE |

Kaya changed its tagline to emphasise it was more beauty salon and less dermatology clinic

emphasis on products back then and beauty products play a key role in acquiring customers.” To be fair, Kaya did try to set things right and revamp its business model — but it’s not worked so far.

LATHER, RINSE, REPEAT In 2006, Kaya stepped beyond the clinic format and opened Skin Zones in select malls. These information kiosks offered counselling on skincare and helped build brand awareness and reach among target customers. And following the slowdown in FY09, it also expanded its repertoire to offer “normal”, more affordable beauty treatments such as facials. Of course,

“Increasing same store sales, emphasising products and offering difficult-to-duplicate, revolutionary cures will ensure Kaya's success 40

—HARSH MARIWALA CMD, Marico

this strategy came with its own set of problems — now, Kaya was in direct competition with neighbourhood beauty parlours, which were cheaper, more conveniently located near customers’ homes (Kaya’s clinics are typically in posh market areas such as Delhi’s Khan Market and Bandra in Mumbai). Moreover, these “affordable” services meant the average billing per customer would drop, making it that much more difficult for the store to break even. It didn’t help that the FY13 Budget imposed a 12.3% service tax on skincare and wellimpacting all ness services, imp organised organise s d players player in the space, including Naturals, Hindustan Unilever’s U aren’t Lakmé Salons (which (w either) and doing too well, eit sources estiKaya. Industry so outlet mate that each Kaya K needed about 4400 - 450

“Kaya was known more for its skin cure solutions, while beauty products play a key role in acquiring customers —VANDANA LUTHRA Founder, VLCC SOUMIK KAR AND BHUPINDER SINGH

2 March 2013 / Outlook BUSINESS

customers a month, with average billing of #7,000 each. Instead, what it achieved was an average bill value of #5,000 for about 300 400 customers every month. For the industry as a whole, fixed costs comprise 55% of the total costs of a store while variable costs constitute the remaining 45%. Starting last year, Kaya made a determined effort to communicate that it was more than a skin cure treatment provider. The brand changed its tagline from “Let your skin talk” to “Love what you see”, to emphasise it was more beauty salon and less dermatology clinic. The clinics were also remodelled to reflect this changed positioning — the clinical beige gave way to more-stylish burgundy and rounded edges were introduced to exude warmth and care. As part of the campaign, Kaya also introduced the “wall of beauty” initiative, where customers were encouraged to post testimonials on the brand’s website — so far, some 592,133 women have uploaded their images and feedback. Indeed, Kaya’s efforts on the net have perhaps been more effective than its traditional media campaigns — which have had middle-rung celebrity endorsers such as Pooja Bedi, Riddhima Kapoor and now, Giselle Monteiro. Kaya is fairly active on social

| CORPORATE |strategy

media, based on insights that its target customer spends a lot of time online, with the result that its Facebook page has over 186,000 “likes” and close to 2,000 followers on Twitter (twice as many as VLCC, incidentally). Perhaps the biggest challenge for Kaya has been to keep a lid on costs. Since it pays its higher-than market wages in a bid to minimise attrition — about #20,000 25,000, according to industry estimates — Kaya has now started moving staff between centres in a city depending on the demand for services, rather than hire at peak-demand level for every centre. Still, attrition remains a challenge — Mariwala complains that many dermatologists leave Kaya to set up competing skin clinics of their own. The lack of an incentive structure is also to blame, says Kumaravel. “Employees are constantly under pressure to deliver and they aren’t being rewarded for good performance,” he points out. Now, Kaya is hoping that reducing its dependence on services — and therefore, staff — will help it finally turn around. In December, the brand announced a new format that will cut costs and drive penetration. At 500 -700 sq ft, the Kaya Skin Bars will not only be half the size of the Skin Clinics, they can be set

up at half the cost as well (#30 40 lakh on average). There will be no dermatologists at the Skin Bars, which will offer limited services — whereas 75% of the Clinics’ revenue comes from services, the Bars will derive 75% of their revenues from products, for which Kaya is expanding its 36 - SKU portfolio by another 18 -20 in the coming few months. The management estimates that a Skin Bar should

“Customers have to shell out three times more for a skincare package from Kaya than what their competitors charge —CK KUMARAVEL, Co-founder and MD, Natural Spa and Salons

RA CHANDROO

break even within three years whereas a Clinic takes four to five. “At present, there is no plan to either shut or convert the existing Skin Clinics into Skin Bars,” adds Pahwa. Kaya plans to open 150 200 such small-format stores over the next five years. Will this MaKe a difference? Mariwala sounds confident. “Increasing same store sales, emphasising products and offering difficult-to-duplicate, revolutionary cures” is his recipe for Kaya’s success. It will take more than that, warns Luthra. “The new staff being brought in to run the business are from a non-beauty, FMCG background. What most players don’t realise is that this business requires a high level of domain expertise and consistent investment in R&D, technology absorption and training. Moreover, by launching Skin Bars, Kaya will compete with product specialist companies.” Brands like Biotique have found out the hard way that products-only stores don’t always work out — the high-end beauty products brand has scaled down its exclusive outlets and now focuses on multi-brand retail outlets. Vanity and the need to look good will always be popular, but whether Kaya’s makeover will make money from serving that need, remains to be seen. b

Outlook BUSINESS / 2 March 2013

41

strategy | MARKETING |

Different s CAN TABLET DEVICES REALLY EXPERIENCE THE EXPLOSIVE GROWTH THAT MOBILE PHONES HAVE? Rashmi K Pratap

W

hat comes to your mind when you hear names like VeeDee, Black Elemente, Zinglife, Swipe, Ice Xtreme, Kobian and Redd? Deodorants, maybe? Apparel brands or pubs? How about, none of the above? These are just some of the over 135 brands of tablet computers that have flooded the Indian market in the past year or so. Almost all the big brands — Apple, Samsung, Asus,

42 Sony, Dell, BlackBerry et al — are already present in the country but, while they have their fans and aspirational value, apparently it’s the Xelectronics and Zyncs that are flying off the shelves. According to data from CyberMedia Research, over 63% of all tablets sold in India cost under #10,000. And boy, are they selling — 2012 sales are likely to have crossed 3 million, up six times from 500,000 in 2011; the research firm’s forecast for 2013: at least 6 million. Granted, that’s growth on a tiny base and is still nowhere close to the numbers seen in the US or even China. Recent reports predict that, with sales of over 65 million units, China will account for 27% of the global tablet market in 2013, while North America will continue to be the largest market, accounting for 85 million units. There’s also the inevitable, if unfair, comparison with mobile phones: during the July-September 2012 quarter, some 2 March 2013 / Outlook BUSINESS

1.1 million tablets were sold across India; the same period saw sales of around 50 million handsets, of which nearly 4 million were smartphones (priced at around #15,000). But look at it this way: mobile phones have been around for nearly two decades; there’s a subscriber base of more than 900 million and several consumers have multi-

Tab story (July to September 2012)

1.1 million units (Sales) #13,200

(Average price)

137 (Number of brands) 7 inch (Most popular screen size) 91.3% (Share of Android devices) Source: CyberMedia Research

strokes 43

ILLUSTRATION BY KISHORE DAS

Outlook BUSINESS / 2 March 2013

strategy | MARKETING |

First mover advantage In India, Samsung is much ahead of Apple in the tablet market Share in terms of unit shipments (July to September 2012)

23.9%

Samsung 15.3%

Micromax

12.3%

Datawind* HCL ME Apple

9.4% 8.7%

Source: CyberMedia Research *Excludes sales of Aakash tablets to Govt. of India

ple handsets. On the other hand, broadband and 3G connectivity in India, essential for tablets, is still very patchy. Which begs the question: can India leapfrog its way in tablets and repeat the kind of explosive growth that it witnessed in mobile phones? If yes, is there anything that can hold it back?

44

THE COST FACTOR A June 2012 report by McKinsey & Co lists affordability as the first requirement for driving tablet growth worldwide. From the looks of it, Indian tablet brands have already got that covered. Of the

Certainly, cheaper tablets have the potential to open up the market to a whole new customer group — lower income households, those reluctant to invest in a personal computer or notebook, and those who will leapfrog to the latest technology. But how are they able to keep prices so low? “There is an increasing number of low-end devices being launched by OEMs, enabled by both hardware commoditisation driven by China and Taiwan-based suppliers, and OS availability [most of these devices run on Google’s open operating system, Android],” explains Jayantha Kolla, partner at tech consultancy Convergence Catalyst. That’s not all, says Suneet Tuli, founder of Datawind, the British company that’s making the Aakash 2 tablet for the Indian government (a non-subsidised version is marketed under the Ubislate brand). He says that the LCD touch panel accounts for as much as half the manufacturing cost of the tablet; to keep a lid on that, Datawind has its own LCD touch panel plants, one in Montreal with a second one coming up in Hyderabad. The design of the tablet also plays a crucial role in keeping prices low. The Aakash

the chain, resulting in obvious savings.” And taking a cue from Google, the company also sells ad space on pre-loaded apps on the Ubislate, where it splits the revenue with app developers. Datawind’s desi counterpart, Micromax — it’s currently the No.2 tablet maker in the country behind Samsung, with a 15.3% marketshare in Q 3FY13 (see: First mover advantage) — has a slightly different strategy to keep prices low. The company has five models in the

“Consumption is bound to go up because there are so many people in India keen to get connected, but they don’t have a device —SUNEET TULI CEO, Datawind

CHEAP TABLETS HAVE THE POTENTIAL TO OPEN UP THE MARKET TO LOWER INCOME HOUSEHOLDS AND THOSE WHO WANT TO LEAPFROG TO NEW TECH 137 brands currently in the market, nearly 90 are in the sub-#5,000 segment and about 35 cost between #5,000 and #10,000, according to industry estimates. Where the iPad3 32 GB retails at #38,000 and the smaller Google Nexus 7 (considered the best in class among Android tablets) is available at close to #20,000, also available are 7-inch, wi-fi enabled tablets for as little as #2,999. That includes littleknown brands such as Sylvania, Vox and Zync. 2 March 2013 / Outlook BUSINESS

2 printed circuit board integrates components and costs Datawind under #900, compared with more than #1,500 for rivals. The devices are also assembled in Amritsar, saving on labour costs. “We have our own IP on the screens. And, we have a disruptive distribution model,” Tuli adds. Simply put, that means Datawind sells its products only online, doing away with a distribution network where it would have to share revenue. “That removes a lot of people from

market, with the cheapest costing less than #5,000, if bought online. Essentially, contract manufacturing in China and a wide, pan-India distribution network are helping the company achieve volumes. Adds Deepak Mehrotra, CEO, Micromax, “We don’t over-design our products. Features are added keeping customer usage and preference in mind.” The Funbook Alpha is targeted at students and comes loaded with educational apps and games, while the Funbook Infinity PHOTOGRAPHS BY VISHAL KOUL

strategy | MARKETING |

46

is primarily an entertainment device and, hence, has loud speakers. Obviously, then, manufacturers are working overtime to differentiate themselves. But who’s buying these tablets? While Datawind’s biggest customer is the Indian government, which has placed orders for 100,000 units of Aakash 2, the company has orders for 4 million pieces for the Ubislate, mostly from first-time computer users. “Consumption is bound to go up as there are so many people in India keen to get connected, but they don’t have a device,” adds Tuli. The McKinsey report also estimates that new, less affluent customer segments “will fuel around 60% of the total cumulative sales through 2016”. It may be a while, though, before older customers and those from smaller towns and nonurban geographies in India take to the new technology as enthusiastically as they have accepted mobile telephony. For the time being, tablet sales are ticking all predict-

able boxes — younger consumers are early adopters of this relatively new technology and the maximum demand for tablets is coming from metros. Mehrotra says large format stores and experience retail outlets where consumers can touch and feel the devices are the biggest sales channels. “Currently, online accounts for 8 -9% of our sales, while IT and mobile retail channels are seeing fast growth,” he says. But like Tuli, he recognises the importance of selling through the net. “One of my earliest orders for a tab, in April 2012, came from a customer in the North East. And it came online,” Mehrotra points out.

MARKETING UPFRONT Still, most tablet makers seem to be focusing their marketing activities across three main planks — entertainment, education and enterprise — which they hope will cut across age and income categories. Samsung Mobile vice-president Asim Warsi says that his company has a “fairly clear enterprise focus” and within it, a key segment it is

“Tabs are complementing devices and not a replacement for smartphones by any measure —ASIM WARSI Vice president, Samsung Mobile India 2 March 2013 / Outlook BUSINESS

“We don’t over-design our products. Features are added keeping customer usage and preference in mind —DEEPAK MEHROTRA CEO, Micromax India

pursuing is education. Samsung is currently the leader in the tablets market, with a 24% marketshare for its three models, which are priced at the higher end of the market, ranging from #21,000 to #40,000. What make them popular in the enterprise and education segment, Warsi explains, are relevant apps. Samsung is also working with the government — Samsung tabs used by members of Parliament are loaded with apps that enable MPs to see details of the various sessions, starred questions for the day, parliamentary bulletins and other information. He adds that the tabs are being used by enterprises for sales force automation, which allows the head office to keep track of work being done by the sales team on a realtime basis. Another company that’s turned to the enterprise segment to push tablet sales is BlackBerry (earlier Research in Motion). When the company slashed prices on its Playbook tablets by nearly half in

“Tablets, as a category, are gaining huge market traction. I believe this will play a big role in data services going mass in India —V SRINIVASAN President, consumer business, Bharti Airtel

50

a special year-end offer in winter 2011, sales zoomed. So much so that Sunil Lalwani, director of enterprise sales at BlackBerry India, told Outlook Business at the time that the company was out of stock on one Playbook model due to huge demand. Given the BlackBerry connection, the interest is understandable. Explains Amit Mathur, director, channels, for BlackBerry India, “With the rise in bring-your-own-device as a trend, the lines between personal and professional lives are blurring and a tablet helps switch between functions effortlessly.” The biggest push for tablet makers, though, is expected from the education segment. Several state governments — including Uttar Pradesh, Tamil Nadu, Punjab and Goa — have already made poll promises of providing high school students tablet computers, apart from the HRD ministry buying Aakash 2 in bulk for subsidised sale to school and university students. Some upscale individual schools across India, including Mahara2 March 2013 / Outlook BUSINESS

ni Gayatri Devi School in Jaipur and Podar International School in Mumbai, are also offering students the option of switching from regular textbooks to iPads. Considering there are some 220 million students in India, if even a fraction of them move to tablets, we’re talking of a market of several million. As Bharti Airtel’s president, consumer business, K Srinivas says, these devices are a popular choice for most first-time internet users. “Tablets, as a category, are gaining huge market traction. I believe this will play a big role in data services going mass in India,” he says.

EXPERIENCE IS EVERYTHING With so much going for it, what’s holding back tablets adoption in India? Essentially, user experience. How well a tab works is not only a function of its hardware and software quality; it also depends on telecom networks and the availability of apps. In India, both areas leave a lot to be desired. Mehrotra of Micromax says that growth could have been much faster but for two things — what a person can do with a device and how he

Moreover, unlike for mobiles, especially smartphones, telcos haven’t launched special data usage plans for tablets, nor are they offering bundled deals with specific devices. “We are not tying up with vendors yet,” confirms Anupam Sachdev, CMO, Aircel Cellular. “The focus is more on smartphones as consumption is bigger in that segment. But certainly, tablet growth will explode as broadband networks expand over a period of time.” As of now, operators don’t have tabs-specific plans as they believe the non-voice plans designed for dongles work for the tabs as well. Idea Cellular CMO Sashi Shankar says his company offers enough data plans for consumers to choose from. “There is no need for separate data plans for tabs because over a period of time, there will be plans catering to two-three devices per person and tabs will be covered in that.” Moreover, data consumption habits tend to be the same across dongles and tablets. While tabs are growing fast as a category, Idea is still evaluating the option of bundling them with connections. “We want to market tabs at

SOME SCHOOLS IN THE COUNTRY ARE ALREADY OFFERING STUDENTS THE OPTION OF SWITCHING FROM REGULAR TEXTBOOKS TO IPADS can do it. The second part requires connectivity at reasonable price points. “The existing data plans are great for usage on phones but not for tabs. If you want these devices to take off in the hinterland, you need good, high-speed pervasive networks and reasonable data tariffs,” he says. Vishal Tripathi, principal analyst with Gartner India, says that patchy coverage, especially in 3G networks, is playing spoilsport. “The tab requires good 3G networks or wi-fi spots. Without them, it doesn’t offer much utility.”

the right price and with the right features. We haven’t got the right pricing so far,” Shankar adds. Tablet makers are trying to work their way around the lack of 3G connectivity and high data usage charges. Brands such as Aakash, Micromax and Lemon are launching low-cost devices with embedded GPRS modems, which eliminate the need for external dongles. Trouble is, GPRS provides data speeds of just 56 -114 kbps, which is inadequate for bandwidth-hungry applications such as video streaming and music file downloads. 

strategy | MARKETING |

52

If that’s not bad enough, there’s also the question of content. While browsing the net and checking e-mail remain the most popular activities on tablets, as customers evolve, their demands from tablets will change. Right now, though, there’s a paucity of India-specific apps. “The cost of creating apps for tablets is 30 - 40% higher than for mobiles,” explains Nitish Mittersain, CEO, Nazara Technologies, which develops apps for mobiles and tabs. “Because tablets are more powerful devices with bigger screens, everything — the graphics, the experience etc. — has to be of console quality, which increases the cost of development of games and content.” Still, efforts are being made to provide Indian tablet buyers relevant content. Market leader Samsung, for instance, has R&D centres in Bengaluru and Noida, as well as third-party developers, content aggregators and middleware partners to develop apps. “We have some seven series of apps for

WHILE TABLETS ARE MAINLY USED FOR INTERNET AND E-MAIL, AS CONNECTIVITY IMPROVES, USAGE PATTERNS WILL UNDERGO A CHANGE India, designed primarily for tabs. Localised apps are very important for growing tablets as a category,” says Warsi. BlackBerry, too, has devised applications that will appeal to its enterprise customers. Currently, the company has over 40,000 developers in India creating applications for the BlackBerry platform. It has also set up a lab in Kochi to focus on local app development and offerings include applications for specific fields such as healthcare. For instance, Max Healthcare has rolled out an BlackBerry solution that connects an archive of radiology images, lab reports and other patient information that doctors can access on their BlackBerrys and Playbooks at any time.

REALITY CHECK Given all that is happening around, it’s easy to get carried away when talking of the potential for tablets in India. The comparison with mobile phones is usually offered as an example of what’s possible — so many millions still don’t have landlines, but mobile penetration in India is a staggering 73%. In the West, tablets are becoming ubiquitous and are predicted to outship notebook computers this year. But that’s not going to happen anytime soon in India. For starters, no one — not even tablet manufacturers — is yet thinking of the tablet as a replacement for the per-

“The cost of creating apps for tablets is 30-40% higher than for mobiles because they have bigger screens than mobiles —NITISH MITTERSAIN CEO, Nazara Technologies SOUMIK KAR

2 March 2013 / Outlook BUSINESS

sonal computer, or even the smartphone. “Tabs are complementing devices and not a replacement by any measure,” declares Warsi. “Most consumers who have a tab have a phone already. We have been evangelising both categories with equal gusto.” According to Manufacturers Association of Information Technology (Mait), tablet sales in India are expected to cross 1.6 million units in FY13, a growth of 40% over the previous year. (Incidentally, that’s a more conservative estimate than CyberMedia Research, which considers devices with screens of over 5 inches as tablets against Mait’s cut-off of 7 inches.) Over the same period, the PC market (desktops and notebooks) will grow 16% to cross 10.8 million units. “Currently, the value proposition of tablets is not clearly established. It will not be a priority purchase, unlike mobiles, which address a basic, inherent need for communication,” says Anwar Shirpurwala, executive director, Mait. As things stand, vendors are ready with a wide range of tabs, offering options in price, connectivity and screen size. Then, none of the barriers to broader usage, be it network issues, lack of apps and user experience, is significant enough to be a deal-breaker. Convergence’s Kolla points out that one reason why the tablets app ecosystem will take time to develop in India is because currently only 8% of buyers base their decisions on the availability of appropriate apps. But, put all these issues together and it doesn’t seem likely that the segment will witness exponential growth for a while. Not unless some or all of the pain points are addressed immediately. b

markets TREND Is the Sensex headed for a deeper correction in the days ahead? DEBATE Anirudha Dutta and Dharmakirti Joshi on whether the FY14 Budget will be market friendly INVESTING GVK is dealing with fuel shortages and debt issues

| INSIDER TRADE |

5% The GDP growth forecast for FY13, the lowest in a decade on account of subdued investments

Credit increased and deposits fell as banks lowered rates by 4% during the last four years Deposits/GDP Credit/GDP

in %

69

68

68

51

50

2010

2011

48 2009

67

52

2012

Source: Morgan Stanley

VISHAL KOUL

Buying what he understands Pradeep Kumar Jain of Parsvnath Developers has been continuously buying shares from the open market since end2011. From 21.35%, Jain has increased his holding to 24.42%. The latest purchase of 1.14 lakh shares came at an average price of #39 a share. Incidentally, the stock, after hitting a high of #61 in June 2012, has come off and now trades at #41. The debt on the company’s books, at #1,711 crore, continues to weigh down profits. In FY12, net profit stood at #69 crore against an interest outgo of #282 crore. Similarly, in

H1FY13, the net profit of #38 crore has been dwarfed by an interest expense of #145 crore. The company has a low-cost land bank of 190 million sq ft acquired at an average cost of #200 per sq ft and 70% of its projects are townships. Parsvnath is looking at plot sales and disposal of noncore assets, besides improving execution to tide over the adverse times. While the market is selectively bullish on realty stocks, Jain is using the opportunity to tighten his hold on the realty company in anticipation of good times ahead. b

Rising food prices contributed the most to wholesale inflation in January Food products 12.2

Beverages, tobacco and tobacco products 1.8

Mineral oils 12

Coal 4.8

Chemicals and chemical products 8

Rubber and plastic products 1.1 Contribution to wholesale price index in %

Outlook BUSINESS / 2 March 2013

53

markets | DEBATE |

Will the FY14 Union Budget be market friendly? It’s the last Budget of a government facing general elections but markets could well be cheering in end-February

THE INSIDE STORY DEEPAK REDDY BAJAJ FINANCE Sold 2,187 shares @ #1,300.46 per share Holds 0.01% stake KRIPAL SINGH DOLPHIN OFFSHORE Bought 2,082 shares @ #115.63 per share Holds 5.35% stake* PUNEET KHURANA EVEREST KANTO Bought 37,487 shares @ #27.40 per share Holds 4.25% stake*

54

TUSHAR MANE

FILE PHOTO

ANIRUDHA DUTTA

DHARMAKIRTI JOSHI

Independent market analyst

Principal economist, Crisil

The upcoming Budget will likely be market-friendly, given that the finance minister has been making the right noises in his roadshows. He has assured that the fiscal deficit numbers will not disappoint — that is actually the key number to look at. Apart from augmenting public investments in infrastructure projects like the Delhi-Mumbai freight corridor and timeframe for GST, we could see steps to boost revenues through higher taxes — service tax and standard excise duty may be hiked to 14% — and rationalisation of expenditure by way of clubbing social welfare schemes under the Aadhar-based direct transfer of funds. The markets will like that as it will mean a cut in expenditure.

It’s most likely the FM will introduce some measures for incentivising private investment. Being the last Budget before the general elections, it will be a delicate balancing act between populist measures and achieving fiscal consolidation. Some of the measures that will make markets happy will be the removal of bottlenecks around the mining sector, which will give a boost to the power sector, measures to fast track clearances, roadmap for introducing GST and better targeting of subsidies through Aadhar-based direct cash transfers. Restructuring expenditure will be crucial to getting growth back on track — that is where the Budget may score as a market-friendly one. b

2 March 2013 / Outlook BUSINESS

MEHUL CHOKSI GITANJALI GEMS Bought 170,000 shares @ #575.40 per share Holds 51.37%* DINESH HIMATSINGKA HIMATSINGKA SEIDE Bought 130,000 shares @ #37.5 per share Holds 11.07% stake* RAVI KIRAN AGGARWAL ORBIT CORPORATION Sold 172,588 shares @ #73.08 per share Holds 19.28% stake* Note: *Promoter’s stake in personal capacity. This holding does not include other investment companies and persons acting in concert. Insider trades from 21 January to 6 February, 2013

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markets | TREND |

Running out of steam THE BSE MID-CAP INDEX IS ON A DOWNWARD SPIRAL. WILL THE SENSEX FOLLOW?

A

fter rallying for the past couple of months and crossing the 20 , 000 mark, the markets seem determined for a correction. While the year-to-date fall in the Sensex is less than 1 %, the stress is visible in the mid-cap and small-cap indices, which have fallen by 6 - 9 % over the same period. Could this

56

mean a deeper correction is yet to follow in large-caps? Typically, a fall in the mid-cap index is an early indicator of a possible downtrend across the board. Mid-caps not only tend to beat the markets on the upside, they tend to lead the fall and that too precipitously on the way down. That’s because mid-caps gain the most from a positive change in the economic climate and end up being the first victims of deterioration in business confidence. This time, though, the reason for the slide in mid-caps is not entirely a reflection of the state of the economy. Over 2012, the BSE mid-cap index was up close to 40%, with most of the gains coming in the last quarter of the year. So, after the rally, a consolidation was bound to happen. Analysts feel that major investors must have shifted their funds from mid-caps and small-caps to frontline stocks after the better-than-expected results delivered by companies such as Reliance and Infosys. While a sharp fall in mid-cap stocks could be the result of drawdown by investors to realign their portfolios in favour of large-caps, 2 March 2013 / Outlook BUSINESS

TUSHAR MANE

it is also attributed to revocation of pledges in many cases. As for large-caps, they are not as vulnerable to pledged shares; still, Anand Rathi’s Sandeep Shenoy asserts that a correction in frontline indices can’t be ruled out. “Many of the large-caps have exhibited strong traction in earnings but they may still not be out of the woods. Hence, earning glitches could be on the cards next quarter onwards. This, on the back of rich valuations, leads us to believe that bouts of correction would be a part of our markets for some time.”

Going downhill The fall in the mid-cap index could spell bad news for the market in %

3 2 1 0

Sensex 19,485

-1 -2 -3 -4 -5

Mid-cap 6,743

-6 Jan 1

Feb 8

That is not the unanimous view in the market, though. Jigar Shah, head of research at Kim Eng Securities, strikes an optimistic note when he says that the fall in growth in the economy and the corporate sector has bottomed out. “Unless there is an unforeseeable event in the global markets, I don’t see an immediate downside for the Sensex,” he points out. Meanwhile, all eyes are on the Budget, scheduled to be tabled end-February. “Any major corrections will depend on the Budget, but perhaps that will not come to pass because with the upcoming general elections in 2014, the government will probably avoid upsetting the market,” says Shah. Netnet, while market movement in the recent sessions point towards a decisive correction, there is no definitive view on whether corporate performance will get better or worse in the coming quarter. A sliding market ahead of the Budget means expectations from the finance minister are muted, and could set the stage for a positive surprise. Let’s hope it’s also something that the finance minister is preparing for. b —RAVINA KOTHARI

markets | INVESTING |

Estimated time of deb THE UNCERTAINTIES AROUND ITS POWER AND AIRPORT BUSINESSES HAVE KEPT GVK FROM SOARING Shabana Hussain

Y

ou would expect the company that runs two of India’s busiest airports to be an investors’ darling. But that’s not quite how it is for GVK Power & Infrastructure. From trading around #40 a couple of years ago, the company’s stock is down to #13 now. On their part, investors have had good reason to be spooked. The company has been posting a net loss since Q3FY12. For the latest quarter for which financials are available, GVK reported a net loss of #43.66 crore. Adding to the company’s woes is a gross consolidated debt of around #15,000 crore which translates to an interest outgo of over #700 crore every year.

58

Certainly, the flagship power business hasn’t been doing too well. Operational performance has been deteriorating, with a total generation of 684 million units in Q 2FY13 against 1,299 million units in the previous quarter. “The losses could continue for a few more quarters because of the shortage of gas supply for our power plants and the high interest burden,” says a candid Isaac George, chief financial officer, GVK Power & Infrastructure. Still, there is a glimmer of hope here: the Andhra Pradesh government has agreed to allow two of GVK’s gas-based power plants (Jegurupadu Phase 1 and 2 and Gautami), among others, to run on imported liquefied natural gas, since they’re not getting sufficient supply from Reliance’s KG -D6 basin. “If this comes through, it will put us back on track,” says George. More significant for GVK , though, is a recent positive development in its airport business. 2 March 2013 / Outlook BUSINESS

CASH COUNTER While the airport business now brings in as much revenue as the power arm, it continues to drain cash. GVK’s attempts to bridge its cash flow requirements received a boost when the Airport Economic Regulatory Authority (AERA) decided that Mumbai International Airport (MIAL) — in which GVK has a 50.5% stake through its subsidiary GVK Airport Holdings — could continue to levy airport development fee (ADF) for another eight years. The earlier decision to discontinue the fee by January 2013 was overturned, although MIAL’s request to increase the levy to #200 for domestic passengers and #1,300 for international passengers (against the current #100 and #600, respectively) was rejected. AERA has said that a total #3,400 crore can be collected through ADF, including the #750 crore already collected from passengers since 2009. The fee will help bridge the funding gap of redeveloping

the airport — against an earlier estimated #9,802 crore, the final cost of construction is now estimated at #12,070 crore. “This approval significantly addresses the overhang of the large funding gap that existed in financing the Mumbai airport capex,” write IDFC analysts Shirish Rane and Ashish Shah in a report. There’s more. The company’s twoyear wait to develop 200 acres of

bt departure: Unclear

59

FILE PHOTO

WHILE THE AIRPORT BUSINESS OF GVK NOW BRINGS IN AS MUCH REVENUE AS ITS POWER ARM, THE FORMER CONTINUES TO DRAIN CASH land around Mumbai airport may also soon be over. “We are waiting for just one sign-off from the chief minister. The moment it happens, we will start work on monetisation,” says George. About 15 -20 million sq ft can be developed on the land, where use

is restricted to hotels, serviced apartments, office space and retail development. The marketing rights for the project, named GVK Sky City, has been bagged by property advisory Jones Lang LaSalle (JLL). Some 3.5 million sq ft will be developed in the first tranche,

which will start by end- CY13. “We are waiting for permission from MMRDA and other local authorities,” says Anuj Puri, country head, JLL India. “The good thing GVK is doing is that it is not coming out with auctions till all the approvals are in place, which is Outlook BUSINESS / 2 March 2013

markets | INVESTING |

why the process has taken a little longer. We expect that over the next two to three months, all approvals will be in place.” Six plots totalling 15 acres will come up for auction this year — since the government through Airports Authority of India (AAI) holds 26% in MIAL , there will be a public auction. The land will be given on 30 -year lease to developers with the option to extend for another 30 years — MIAL will not develop the land, but will earn revenue through lease rentals. A January 8 report by JP Morgan Equity Research — perhaps the only report that views the company positively — values the airport land at #1,250 crore and has said that approval of monetisation of Mumbai airport land will be a positive. Nevertheless, other analysts remain scepti-

60

“The losses could continue for a few more quarters, given the shortage of gas supply and the high interest burden —ISAAC GEORGE CFO, GVK Power and Infrastructure

FILE PHOTO

2 March 2013 / Outlook BUSINESS

cal of GVK’s future prospects — with good reason.

HEAVY WEATHER A big overhang on the stock is GVK’s $1.26 billion acquisition of Australia’s Hancock Coal in 2011. “It is a negative because nobody knows the deal contours and how exactly it is going to pan out,” says Phillip Capital analyst Vibhor Singhal. While GVK Power holds just 10% in the project — the rest is held by GVK Coal Developers (Singapore), a subsidiary of group company GVK Natural Resources — it stands guarantee for 49% of the debt taken for making the acquisition. Analysts say this is not good governance, a charge George denies. “It would have been bad corporate governance if we had not disclosed this structure, but we did. Besides, this is not the final structure — the promoters may collapse their holding company into GVK Power plus there is the option to increase our stake,” he defends. Certainly, GVK Power has the option of increasing its stake in Hancock Coal to 49%, but that would mean additional equity requirement. “It would be a very bad idea,” cautions Singhal. “The company already has huge debt.” While the company is trying to reduce that — by selling stake in its airports and roads business — it hasn’t had any success yet. In early January, the market celebrated briefly when GVK announced its exit from a road project in Madhya Pradesh. A year earlier, the company had signed a concession agreement with the National Highways Authority of India (NHAI) for four-laning the Shivpuri-Dewas section of NH-3. The #3,200 -crore project was to be executed as a build-operatetransfer toll project with a 30 -year concession period. But GVK backed out, citing delays in securing environmental clearances from the

Dip ahead With GVK pulling out of road projects, its contribution to overall revenues could further drop

in %

Airports

46

Power

45

Roads

9

Source: JP Morgan FY13 estimates

government — a Supreme Court ruling now makes it mandatory to get the green go-ahead even for projects involving extraction of minor minerals, and road projects use minor minerals such as boulders, fuller’s earth, quartzite and sandstone. “Bankers are no longer willing to fund projects that don’t have clearances,” points out M Murali, director general of the National Highways Builders Federation. So, when NHAI failed to get the necessary clearances, GVK sent a notice to terminate the project. The case is now being heard in the Delhi high court. Rahul Metkar, an analyst with MSFL Research, says the real reason for the termination must be banks’ refusal to give GVK loans on favourable terms or the company may have had problems with financial closure. “GVK bid for this

A BIG OVERHANG ON GVK’S STOCK IS THE COMPANY’S $1.26 BILLION ACQUISITION OF AUSTRALIA-BASED HANCOCK COAL TWO YEARS AGO

OIAD1212A

markets | INVESTING |

Cost of flying high GVK’s debt has increased due to high capex and capital raised for increasing its airport stake 10,000

Figures are in ~ million

0

-10,000

4

4

GUIDED LANDING 4

-20,000

-30,000

4

FY08 FY09 FY10 FY11 FY12 Free cash flow Cash flow from operations Source: Company, Ambit Capital

62

project when there was euphoria in the market. With the economy not doing well, the road sector is seeing a slowdown. This could have influenced the company’s decision to quit the project,” he adds. But the fallout of this decision is still not clear. Murali says if GVK loses in court, it will have to forfeit part or all of the 10% project cost it had submitted as performance guarantee. Worse, the developer could be blacklisted by NHAI for anywhere up to three or five years. Of course, there is a chance that GVK could win the case. “Partially, NHAI is at fault because it is supposed to get clearances by the time the concession agreement is signed,” points out Murali. If the company gets a favourable ruling it could ask NHAI to make good the investment it’s already sunk into the terminated project. A month after signing the concession agreement, GVK hired L&T Construction and KNR Construction as contractors, which, in turn, signed on some 200 people. In the year it waited for clearances, the company had already spent some #300 - 400 crore out of its #1,300 -crore equity 2 March 2013 / Outlook BUSINESS

commitment. But if it does petition for recovery of funds, the case will certainly go into arbitration — NHAI already has arbitration cases worth over #10,000 crore and it may be well over three years before the case is resolved.

Where the roads business is muddled in litigation, even the airports segment is not without hurdles. The Mumbai and Bengaluru airports saw traffic decline on a yearon-year basis in Q3FY13 — while passenger traffic was down 8% and 10% at these airports, cargo movement had declined 4% and 0.3%, respectively. More worrying, though, is the #1,763 -crore bridge loan GVK took to increase its stake and become the largest shareholders in these airports. GVK part-fi nanced the stake acquisition by securitising its toll collections at subsidiary company Jaipur-Kishangarh Expressway. GVK’s plan to refinance this debt with relatively cheaper USD funding has not materialised yet, wrote BNP Paribas analyst Vishal Sharma in

to #400 crore on a debt of #3,000 crore,” he says. “We expect to raise #3,000 crore, for which we may have to dilute 30 -33% stake. But we are prepared to dilute even up to 49% stake, depending on the valuation.” This is the second time GVK is seeking an investor in the airports business after Changi Airports Group backed out of investing #2,200 crore for a 26% stake in March 2012. The latest development is an internal transfer of promoter shareholding. Stock exchange filings show that matriarch G Indira Krishna Reddy has moved about 5% of her holding to son GV Sanjay Reddy. Analysts say a possible reason is a re-jigging of responsibilities among the promoters. Given that the family is close knit, such a move could also mean that either the promoters might resort to pledging shares or better still, could be in the final stages of selling a stake to a strategic investor. GVK is openly scouting for investors, so the latter could be a likely reason. Group chairman GVK Reddy himself dismisses such a

EVEN AFTER GVK POWER’S PROLONGED UNDERPERFORMANCE, MOST ANALYSTS CONTINUE TO BE SCEPTICAL ABOUT THE COMPANY his earlier report. Metkar adds, “The additional stake acquired has not resulted in any cash flow. That is why GVK continues to rely on other project companies to pay interest on the bridge loan.” To tide over this crunch, GVK is negotiating with a few private equity players to dilute its stake in GVK Airport Holdings. Metkar says the company is looking to raise $250 -300 million equity through this, which will help it save at least #80 - 85 crore on interest expense. George, though, thinks the saving will be much higher. “If this deal comes through, we will save close

development. “This means nothing. It’s just an internal transfer of shares and does not imply selling or pledging of shares,” he says. Despite lagging in the market for so long, most analysts continue to remain deeply sceptical of GVK Power. The poor performance of the gas-based power plants, muted traffic growth in the road segment and the questions around the Hancock deal has led to most analysts rating it as an “under-performer”. Singhal concludes, “There are a lot of moving parts and investors don’t like to invest where there are many moving parts.” b

cover story | PRIVATE EQUITY |

64

Kripa Mahalingam

A NUMBER OF PRIVATE EQUITY INVESTORS ARE STUCK IN THE MIDDLE, STRUGGLING TO FIND PROFITABLE EXITS

BUYER’S M 2 March 2013 / Outlook BUSINESS

65

MARKET ILLUSTRATION: SAAHIL BHATIA BHAATIA

Outlook BUSINESS / 2 March 2013

cover story | PRIVATE EQUITY |

T

66

No buyer in sight Nearly 75% of the investments made during 2004 -2009 are yet to find exits Number of unrealised investments Exits* Total number of investments

422 404

248 100 75 130

258

84 522

111 378

47 51 98

195

2004

2005

27 479 285

2006

2007

2008

* Exits pertain to the year of investment and not cumulative exits for that year Source: Venture Intelligence

2 March 2013 / Outlook BUSINESS

2009

oo much of a good thing can be bad. Take the case of Indian private equity. The initial boom between 2000 and 2005, which saw stellar fund performance, meant India was no longer the land of snake charmers, but the place to be. Be it Warburg Pincus’ 2005 exit from Bharti Airtel, where the firm made its money six times over, ChrysCapital’s exit from Suzlon, where the fi rm multiplied its investment 10 times over, or Baring’s exit from Mphasis, where the fi rm invested #48 crore but took home a whopping #1,150 crore, making money never looked so easy. Investors and bankers, some of them first-time visitors with little clue about India, came in from as far as Iceland to invest in India. Too much money in the hands of inexperienced managers ensured that the euphoria in the public markets spilled over to the unlisted space, pushing valuations to dizzy levels. “It seemed like this gravy train that you hopped on to, put $1 in and got $3 back. Investors assumed the growth story was linear,” says Nainesh Jaisingh, managing director, Standard Chartered Private Equity. Fund managers sold the India story to global investors and how. More than $ 32 billion was invested between 2006 and 2008, almost five times what was invested since the beginning of the decade. Before the gold rush, in early 2006, there were only 75 -odd funds; by end-2008, there were over 200. With the capital influx much higher than the market could handle, a race ensued to snap up companies. Funds ended up outbidding each other and paying bizarre valuations. “This business is all about getting your entry multiple right. This is difficult when valuations are stretched,” says Nitin Deshmukh, CEO, Kotak Private Equity. And at times, shortcuts were taken. “Most funds did not understand the risks that came with scaling up a business and the executions risks involved. Since they were running after the same deal, some of them didn’t do enough due diligence,” says the India head of a US based limited partner (LP) who didn’t want to be named. Limited partners are investors who invest in private equity funds. They can be pension funds, endowment funds of universities or ultra-rich family offices.

PHOTOGRAPHS BY TUSHAR MANE

“It seemed like this gravy train that you hopped on to, put $1 in and got $3 back. Investors assumed the growth story was linear

“In 2006-2007, deals were done at high valuations and exit options were not properly evaluated. An IPO was the only exit option negotiated

NAINESH JAISINGH, MD, Standard Chartered PE

SHASHANK SINGH, MD, Apax Partners

APOCALYPSE NOW

to write about. In the past two calendar years there have been 10 exits through IPOs including Bharti Infratel which raised $760 million. Temasek, KKR , Goldman Sachs and Citigroup invested $1.25 billion in 2007 to acquire a 14% stake in Bharti Infratel at #220 per share. Five years on, they have not much to show for their investment, with the stock currently quoting at #205. “Many attribute the ability to exit to market conditions but as an LP we attribute it to skill. Apart from a few, funds haven’t returned enough capital,” says Nirav Kachalia, managing director, Morgan Creek Capital Management, a New York-based global investment firm that has invested in two funds in India. So far only 494 of the 1,957 deals made during 2004 09 have been exited according to Venture Intelligence, a private equity data bank. This of course does not include the 1,200 -odd investments worth $19 billion that have happened during 2010 -12 . In the next five years, then, the industry will not only have to cut through

The orgy lasted till the world came crashing down on back of the 2008 sub-prime crisis. Lehman went out of business and Iceland barely survived. The unprecedented slowdown threw out of the window all growth assumptions that, on an ExcelSheet at least, had looked easy to achieve. It also means that thanks to fancy valuations they paid during the market peak of 2007, many private equity investments are still underwater. “2006 -2007 was a tough year for the industry, not just in India but also globally. Deals were done at high valuations and exit options were not properly evaluated,” says Shashank Singh, managing director, Apax Partners India. “In the majority of cases, an IPO was the only exit option negotiated and that has not worked out.” According to E&Y research, out of the 461 exits in the past three years (2009 -12), only 50 exits were through an IPO and even there, the returns have been nothing

Outlook BUSINESS / 2 March 2013

67

cover story | PRIVATE EQUITY |

Lemming rush Nearly 50% of investments made were between 2006 - 08 14,316.57 519

10,424.06 488 8,893.67 421 8,210.43 382

10,103.2 483 7,045.68 381 4,049.1 287 2,484.5 194

129.25 15

2005

2006

2007

Source: Venture Intelligence

70

2008

2009

2010

No of deals

2011

2012

2013

in million $

a considerable deal backlog but also work on exits for the fresh investments made. “In India, a lot of invested capital is challenged from a return perspective. Even where the returns are good on paper, a liquid exit is not a given” says Pavninder Singh, managing director, Bain Capital. In 2006 - 08, about $32 billion of private equity was invested and there is no way the IPO market — which in its best year, 2007, raised $8.65 billion — can absorb the capital waiting to get out. “If someone is hanging on to their hat, hoping for a great IPO exit while sitting in some nondescript mid-cap company, they are deluding themselves,” says Standard Chartered’s Jaisingh. Even in PIPE (private investment in public equity) deals, funds haven’t been able to exit their investments. Many private equity funds placed their bets on mid-caps, hoping to ride the expansion in their earnings growth and market cap. Now as their businesses take time to scale, the stock liquidity remains low, as in the case of Allcargo Logistics where Blackstone has invested, Himadri Chemicals where Bain Capital has invested, Nectar Lifesciences, where New Silk Route Advisors (NSR) has invested, or GOL Offshore, where Carlyle has invested. “You can’t just press a button and sell mid-cap stocks in the market. Some of the funds overestimated their ability to liquidate just because the stocks were listed,” says Dhanpal Jhaveri, CEO, Everstone Capital, which manages $1.5 billion and focuses only on private deals.

FIRST IN, FIRST OUT Only a handful of funds, such as ChrysCapital, Actis, Warburg Pincus (despite its misses) and General Atlantic, have had big bang exits, although India Value Fund and ICICI Venture have also had some good exits in their earlier funds. While peers are quick to point 2 March 2013 / Outlook BUSINESS

out that many of ChrysCapital’s profitable exits have been in listed large-cap companies (Infosys, Shriram Transport, Mahindra Financial Services and Idea Cellular) rather than unlisted private firms, return-starved LPs are not complaining. In fact, they chose to back the fund for the sixth time when it raised $510 million in 2012 . “When valuations heat up in the private space, we have the option of backing good entrepreneurs with quality management in the listed space as growth investors. This strategy has worked very well for us,” says Gulpreet Kohli, managing director, ChrysCapital. According to him, it is crucial to know when to take money off the table because public markets in India tend to be cyclical. “We have been disciplined about our exits. We have a narrow window for exits and if we are not disciplined, we will miss out on opportunities,” he says. While a lack of exits haunts the PE industry, it has also discovered that it has to work harder to raise new

“If you do minority deals, you are reliant on the market for an exit. But if you do control deals, you have the option of strategic exits JM TRIVEDI, partner & head, Actis South Asia

cover story | PRIVATE EQUITY |

Where big money was made Good exits have been a function of attractive entry valuations and timing EXIT YEAR

PE INVESTOR

2004-05 2006

INVESTEE COMPANY

AMOUNT INVESTED

Warburg Pincus

Bharti Airtel

$292 million

Baring

Mphasis-BFL

$10 million

EXIT AMOUNT

RETURNS

INVESTMENT YEAR

$1.9 billion

>6X

1999 - 2001

$250 million

>25X

1998

2007

Actis

Punjab Tractors

$60 million

$144 million

>2.4X

2003

2009

ChrysCapital

Shriram Transport Finance

$27 million

$304 million

>11X

2005

2010

Actis

Paras Pharma

$145 million

$457 million

>3X

2006

2011

ChrysCapital

Idea Cellular

$108 million

$170 million

>1.5X

2006

Blackstone

Intelenet

$200 million

$634 million

>3X

2007

Warburg Pincus

Kotak Mahindra Bank

N/A

>$661 million

>3X

2004-06

2011 2011-12 2012

Carlyle

HDFC

$650 million

$1.11 billion

>1.7X

2007

2012

General Atlantic & Oak Hill

Genpact

$550 million

$1.62 billion

>3X

2004 Source: company, media reports

72

money. The days of easy money are over and generating a superior return will be a function of a much more hands-on approach says JM Trivedi, partner and head, Actis South Asia. He adds, “The arbitrage between entry and exit multiple is no longer there. In the absence of a multiple expansion, tangible value can only be added by significantly improving operational metrics.” Actis, which has invested more than $1. 2 billion in over 55 companies since 1996, prefers to go after control deals where it can work closely with the management to scale up the business. Its biggest success came in 2010 when it sold its 60% stake in Paras Pharma for $457 million. That bounty was three times its original investment of $145 million in 2007. “If you are doing minority growth capital deals, you are reliant on the IPO markets for exit. But if you do control deals, then you have the option of strategic exits,” Trivedi says. In India, according to E&Y, control deals still form less than five per cent of the deal mix with minority growth deals and PIPE deals still forming the major chunk. “India remains a growth market, so promoters are unwilling to give up a majority stake in their company. Only in companies where there is no succession plan or the promoter’s immediate family is not interested in running the business, are promoters willing to sell out,” says Bharat Banka, managing director, Aditya Birla Private Equity.

In a growth capital market like India, most PE funds operate as minority shareholders. “You can’t just come for quarterly board meetings and expect results,” says Jhaveri. “Formulating strategies is easy but it is the execution that is challenging. As investors we have to work with promoters closely to ensure things go as planned.”

I SAID, YOU SAID But things don’t go always to plan. Private equity investors have realised that transparency is not a given for

“You can’t come for quarterly board meetings and expect results. We have to work with promoters to ensure things go as planned DHANPAL JHAVERI, CEO, Everstone Capital SOUMIK KAR

2 March 2013 / Outlook BUSINESS

private businesses in India. As for fi rst-time entrepreneurs who ran their business as their personal fiefdoms and viewed private equity interchangeably with bank debt and public equity, they resented that some of the investors came waving agreements in their faces, demanding change. Soon it became an “us versus them” scenario, with PE investors complaining of the lack of corporate governance and promoters complaining of too much interference. “You need to know when to help and when to step back as a partner. There has to be an alignment of interest with the promoter,” says Gopal Srinivasan, chairman, TVS Capital. In some cases the experience has been a bitter one, with the funds having either to write-down or write-off their investment. Take the case of Bain and TPG, which had invested $60 million and $26 million, respectively, for a 45% stake in kids’ apparel manufacturer Lilliput. According to sources, the fi rms chose to write-off their investment after they discovered fi nancial irregularities in the firm’s accounting followed by an acrimonious court battle. While refusing to comment on that specific deal, Bain’s Singh, says, “I think a big part of minority growth investing is who are you partnering with and what their aspirations are. If you get that wrong, there is a chance it will not be a good investment.” Mumbai-based Biotor Industries is another case in point. In 2008, Morgan Stanley Private Equity picked up a 30 % stake in the bio-fuel fi rm for $ 40 million, which it later hiked to 45%. In 2011, the company was accused of committing serious fraud and forging documents to avail loans worth #1,500 crore by three banks. With the company going out of business soon after, the firm is now looking at a #200 -crore loss. If Lilliput and

Biotor are two instances of ugly divorces, there have been many cases of uneasy marriages. Consider Nilgiris, where Actis picked up a controlling 67% stake in 2006 for $65 million. It’s been a tempestuous relationship ever since. Sources say both parties have sparred over how to run the business, raising of capital through a rights issue and exit options. Actis without alluding to the Nilgiris deal points out that wherever differences have cropped up, the fund has managed to sort it out and work with the promoter. There are similar stories in KS Oils and JRG Securities, where investors — NSR and Baring, respectively — and promoters have been involved in public slug fests.

REDEMPTION TIME As their investments take time to scale up, the clock is ticking for private equity funds. Failing to exit in time would mean the next round of fund raising may not happen. In the past, some firms have managed to raise their second round of funds despite not having too many exits but, this time, it’s different. “Some of the LPs are disappointed with the illiquidity and lack of exits in the market, and the high management fees charged for what are often public investments,” says Apax’s Singh. LPs concur with that. “India has been under-performing relative to other emerging markets and that is not going to change in a hurry. Most of the funds need to focus on better fund execution and correct their high fee structure, which is killing the returns for LPs,” says the India head of a US -based LP. Most of the industry operates on a 2/20 model where they charge a 2% fund management fee and a carried interest or performance fee of 20% on the returns generated over the agreed hurdle

BEFORE THE GOLD RUSH IN 2006, THERE WERE 75 PRIVATE EQUITY FUNDS. BY END-2008 THERE WERE OVER 200

Outlook BUSINESS / 2 March 2013

73

cover story | PRIVATE EQUITY |

dollar denominated, the 25% depreciation has knocked off a significant chunk of the capital. “Apart from the high valuations paid in 2006 - 07, the currency depreciation in the subsequent years didn’t help either. In dollar terms, the realised returns on some of the investments are much lower,” says SM Sundaram, partner, Baring Private Equity Partners.

THE COUNTDOWN So, what’s next for the industry? In the next 12 -18 months, given a discriminating public market, funds will actively focus on exiting their investments via trade sales. Secondary sales are already on the rise, increasing from $122 million in 2009 to $1.6 billion in 2012, the largest deal being the $1 billion sale of Genpact, where General Atlantic and Oak Hill sold their stake to Bain Capital. While selling to another tough bargaining private equity investor is not always preferred, funds under pressure to show exits are now more open to secondary deals. Standard Chartered PE used the route for Endurance Technologies, an auto component company where it had invested $50 million in 2007. The firm was initially looking to exit through an IPO in 2010, but couldn’t. Eventually, Actis picked up the stake for $71 million. Similarly, of the four IPO exits that Kotak Private Equity had planned in 2010, only one sailed through; for the rest it had to fi nd exits through strategic and secondary sales.

74

“Right now valuations are starting to look expensive, not in absolute terms but relative to growth, due to fund flows NEERAJ BHARADWAJ, MD, Carlyle Asia Partners rate. But in today’s scenario, for some of the funds, carried interest is a bit like God. They know it is there, but nobody has really seen it. According to LP some funds have raised money just because it was easy to, without exploring whether there were enough opportunities in the market. “There are investment opportunities but they are not as large as you would think. Once you have too much money in your fund, you are under pressure to deploy those funds,” he adds. A few funds have returned money to their investors due to lack of investment options. ChrysCapital and India Value fund have returned $300 million and $100 million respectively to their LPs. The rupee depreciation is not helping their cause either. Since almost 80 % of funds raised since 2007 are 2 March 2013 / Outlook BUSINESS

Where it was lost Deals that did not work out are largely weak businesses that wilted under tough business conditions INVESTMENT YEAR

INVESTOR

INVESTEE

AMOUNT INVESTED

INVESTMENT STATUS

2000-04 2005

Warburg Pincus

Moser Baer

$220 million

Has sold 80% of investment in 2012 at over 90% loss

Temasek

Welspun India

$27 million

Exited in 2012 at 50%+ loss

2005

Warburg Pincus

Vaibhav Gems

2006

Warburg Pincus

Amtek India

#200

$53 million per share*

Exited for #18 crore in 2011, making a loss of 92% Sold over half its holding in 2010 at over a 60% loss

2007

Blackstone

NCC

#202.5

2007

Warburg Pincus

Punj Lloyd

#275

per share*

Stock quotes at #50.70 and the loss stands at 82%

2007

Blackstone

Gokaldas Exports

#275

per share*

Stock quotes at #65.30 and the loss stands at 76%

2008

Nalanda Capital

Mastek

2007

Carlyle

Great Offshore

#860

per share*

Stock quotes at #79 and the loss stands at over 90%

2011

Apollo Global

Welspun Corp

#225

per share*

Stock quotes at #93.80 with losses standing at 58%

Note: Stock prices are as on Feb 6, 2013; Source: company, media reports;

What should help is that India-dedicated PE funds are entering 2013 with an estimated $12 billion worth of ‘dry powder’ (industry speak for unutilised funds), albeit lower than the $17 billion at the start of 2012. “We will be happy to look at some of the secondary’s ourselves,” says Vishakha Mulye, managing director, ICICI Venture. “Many companies haven’t scaled up as expected due to the slowdown, but they are still interesting companies to invest in. You can hold on for the next three or four years and then take them public.” Specialist secondary firms

per share*

$16 million

Stock quotes at #42.65 and the loss stands at 79%

Exited the investment in 2012 at over a 50% loss

*Price at which stock was picked up

such as Paul Capital, Partners Group and Coller Capital are also on the hunt. Secondary funds provide a liquidity option to existing LPs and also provide private equity exposure to new investors. “There are discussions going on. You could see funds buying out an LP’s position in a portfolio at 40 -50 cents to the dollar,” says a private equity head who didn’t want to be named. That enthusiasm solves only part of the problem as many funds are fi nding it difficult to raise a second round of funding. The number of active funds has come down to 100 (excluding the early stage funds) from about 250 -odd in 2010. Then, even in secondary deals the bias is towards companies involved in catering to domestic consumption while most investments made during the market peak were in the infrastructure sector. Given the execution delays in the sector, most funds are now wary of committing money there. PE investors put in almost $6 billion in energy, power and infrastructure between 2006 and 2008. In 2011-12, the infra space saw exits worth just $227 million. For the rest of the investment, there seem to be few takers. Already, the LPs are an uneasy lot, thanks to the lacklustre performance of the funds here as well as the regulatory and economic climate — the general antiavoidance rules (GAAR) proposed in the Budget last year especially spooked global investors. While the subsequent recommendation to defer it for another three

“A big part of minority investing is who you partner with. If you get that wrong, there is a chance it will not be a good investment PAVNINDER SINGH, MD, Bain Capital Outlook BUSINESS / 2 March 2013

75

RA CHANDROO

76

“The risk premium for India has increased because of political and economic uncertainty. So, raising new funds will be challenging SM SUNDARAM, partner, Baring Private Equity years and clarifying the parameters where it can be applied did soothe some ruffled feathers, the damage was done. “The risk premium for India has increased because of the uncertainty in the political and economic environment. So, raising new funds will be challenging since LPs will look for investors with track record of managing multiple complexities,” says Baring’s Sundaram. “Investors will walk away if they perceive inconsistency in policy implementation, which is what happened in the first half of 2012.” The going is expected to be tough for the industry in the next 12 -18 months. “Happy stories don’t make for great learning experiences. There will certainly be rationalisation of funds and people  in the current environment,” says Standard Chartered’s Jaisingh. Lessons have defi nitely been learnt. Funds are strengthening their own teams by in-

ducting more operating partners who can help scale up their portfolio companies. Deal cycles are also getting longer with more emphasis on due diligence and exit options. Funds are also doing a double take as valuations have moved higher over the past year. “Right now valuations are starting to look expensive not in absolute terms but relative to growth since they are getting benchmarked to public market valuations.” says Neeraj Bharadwaj, managing director, Carlyle Asia Partners. “I don’t think the fundamental performance of companies justifies the market being at current levels, it is being driven by fund flows.” Meanwhile smaller funds are already feeling the heat. Blue River Capital (founded by ex-ChrysCap managing director Shujaat Khan in 2005) is finding it difficult to raise its second fund. Eight Capital wound up its private equity business to launch a NBFC; and Kubera (founded by ex-Cognizant chairman Kumar Mahadeva) has shut shop. If the current state of affairs continues, many more funds may be staring at hard options. “In this business you have to prove yourself every four years to your investors, because if you don’t find someone to back you, you are out of business,” says Apax’s Singh. As they say in the PE business, you are only as good as your last exit. b

AS FUND RAISING IS NOW TOUGH, THE NUMBER OF ACTIVE FUNDS HAS COME DOWN TO 100 FROM 250-ODD IN 2010

2 March 2013 / Outlook BUSINESS

cover story | PRIVATE EQUITY |

Hoping for an encore AS PE COMES OF AGE IN INDIA, EXPERIENCED MANAGERS ARE VENTURING OUT INDEPENDENTLY. BACKED BY A REPUTATION FOR DELIVERING, THEY HAVE RAISED A SIZEABLE CORPUS IN A TOUGH MARKET. HERE IS A PREVIEW OF THE SECOND ACTS OF THESE INVESTORS Krishna Gopalan n September 15, 2008, Ajay Relan was in Hong Kong for a Monday morning meeting with a gentleman named Brock Williams. Nothing remarkable about this except that Williams was employed with a firm called Lehman Brothers. It was an awkward occasion, with Lehman having filed for Chapter 11 bankruptcy protection barely a few hours earlier. “He was quite surprised to see me at a time like this. We just looked at each other — it was not exactly the best moment for a meeting,” Relan recalls with a laugh. Finally, they decided to talk a little about the future of the team at Lehman. At that time, Relan was meeting investors to raise capital ($500 million) for his debut fund soon after leaving his position as managing director of Citi Venture Capital International (CVCI) in India. His stint at CVCI had been a successful one. Under his watch, investments in companies like i-flex, Daksh eServices and Progeon yielded very healthy returns. By the time CVCI sold its 41% holding in i-flex to Oracle in 2005, its investment of barely $1 million had rocketed to $593 million. In Progeon, CVCI put in $20 million for a 20% holding, which was eventually sold to Infosys for $115 million. It is precisely this kind of track record that Relan looks to emulate at his firm CX Partners. In the midst of the global financial crisis, he closed his fund with a corpus of $515 million and has invested in Monnet Ispat, Matrix Cellular, Thyrocare Technologies, KPIT Cummins and Sutures India. “We have deployed 60% of our corpus and, by July, we should be at 80%. This was quite inconceivable in 2008,” says Relan. He plans to raise a similar amount during the last quarter of 2013. “Our approach now is to acquire larger stakes for $30-50 million,” he says.

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2 March 2013 / Outlook BUSINESS

SOUMIK KAR

AJAY RELAN Founder & managing partner, CX Partners

LAST ASSIGNMENT Managing director and India head of Citi Venture Capital International (CVCI)

SIZE OF FUND

$515 million INVESTEE COMPANIES Monnet Ispat, Matrix Cellular, Thyrocare Technologies, KPIT Cummins and Sutures India

RENUKA RAMNATH Founder, MD & CEO, Multiples Alternate Asset Management

LAST ASSIGNMENT

P

MD & CEO, ICICI Venture

SIZE OF FUND

$425 million INVESTEE COMPANIES Sara Sae, Indian Energy Exchange, Cholamandalam Investment & Finance, South Indian Bank, PVR Cinemas, Mogae Media

osing for pictures in her office in central Mumbai, Renuka Ramnath appears cheerfully relaxed. “I can smile quite easily since I am not on the road raising funds,” she says with a laugh. After an impressive stint as managing director and CEO at ICICI Venture and now running her own PE fund, she can afford to. “When I entered the business in 2001, there were a lot of people in ICICI who were not completely convinced. They thought I would be better off at the bank,” she says. As it turns out, she proved them wrong, and she’s at it again. Her firm, Multiples Alternate Asset Management, manages $425 million and has invested in Sara Sae, Indian Energy Exchange, Cholamandalam Investment & Finance and South Indian Bank. These include both PIPE (Private Investment in Public Equity) and non-PIPE deals. “Being a smaller entity allows us to look at businesses that are typically under the radar,” she says. Ramnath set up Multiples (a name suggested by her guru Muralidhara Swamigal) soon after quitting ICICI Venture in April 2009. Her eight-year stint was marked by notable investments such as Air Deccan, InfoEdge India, Pantaloon Retail, Metropolis Healthcare, PVR Cinemas and VA Tech Wabag. Shaking off that legacy and starting afresh posed its own challenges. “Today, my investors ask questions related to our ability in raising money, getting good people to join us and clinching a deal in the market. The critical thing in this business is to garner trust and credibility,” she explains. That she has her fair share can be inferred through the investors in her fund, which includes global investors such as Canada Pension Plan Investment Board and the Government of Kuwait’s Public Institution for Social Security, and Indian names like Andhra Bank, Punjab National Bank and Life Insurance Corporation. While she invested in PVR Cinemas during her ICICI Venture days when the multiplex chain had only two properties, Ramnath has again chosen to fund PVR’s buyout of Cinemax at Multiples. Proving a point, perhaps? Outlook BUSINESS / 2 March 2013

TUSHAR MANE

79

BHUPINDER SINGH

I

SUBBU SUBRAMANIAM 80

Founder & managing partner, M Cap Fund Advisors

LAST ASSIGNMENT Partner, Barings Private Equity Partners

SIZE OF FUND

$60 million INVESTEE COMPANIES Jyothy Laboratories, City Union Bank, Regen Powertech (as a co-investor)

2 March 2013 / Outlook BUSINESS

t has been a challenging journey for Subbu Subramaniam, and he makes no bones about it. “We were initially looking to raise $200-250 million,” he says, referring to the time he started M Cap Fund Advisors in March 2010. To date, he has raised $60 million of which $25 million has been deployed. Subramaniam, who spent over 12 years at Baring Private Equity, is candid about his early days at M Cap. “There was a higher perceived risk about being a firsttime fund when we started in March 2010. It was a difficult situation to be in,” he recalls. He quickly adjusted to his new role, though, and jocularly points to what a big difference it is now. “Earlier, having invested in controlling stakes in companies, I would conduct shareholder meetings. Today, with significant minority stakes, I attend these meetings as a shareholder,” says Subramaniam, who was vice-chairman and member of the board at Mphasis, a Baring investee company, which eventually yielded the PE firm a multi-bagger return. Sectors like financial services (City Union Bank), clean energy (a co-investment with IDFC in Regen Powertech) and IT/ITES find favour with Subramaniam. “We will not invest in areas like education and healthcare since we do not understand them,” he says. Subramaniam is upbeat about M Cap’s investment in Jyothy Laboratories made in May 2011. “The company will see serious growth after the Henkel acquisition,” he says. Interestingly, Baring had invested in Jyothy under his stewardship in early 2000, exiting two-and-a-half years later with more than a two-fold return. The investment landscape for private equity has changed considerably, he admits. “Between 1997 and 2002, all of us had a home run with returns of 10X and 20X. Today, the day of reckoning has come as far as returns are concerned,” he says. “It needs to be understood that private equity is illiquid, long-term and part of an alternate asset class.” So, what does M Cap really mean? “It is short for management capabilities. We believe in participating to convert that into market cap,” says Subramaniam.

On stands NOW NO N OW O W

A bright future requires a head start! Outlook Money presents every parent's guide to providing a better future for your children How to cover financial and health risks How to build a portfolio to fund your child's education How to smartly finance your child’s marriage

Creating

Wealth for your Child’s Future Presented by-

- Partnered by -

cover story | PRIVATE EQUITY |

JAYANTA BANERJEE Managing partner, ASK Pravi Capital Advisors

LAST ASSIGNMENT President, ICICI Venture

J

SIZE OF FUND

$40 million INVESTEE COMPANIES Investments in consumer and healthcare sectors expected to be announced

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FILE PHOTO

2 March 2013 / Outlook BUSINESS

ayanta Banerjee quit ICICI Venture in April 2010 after an eight-year stint to start Pravi Capital with former colleagues Anand Vyas and Sunay Mathure. In September the following year, Pravi (meaning “pure” in Bosnian) formed a joint venture with the ASK group. Banerjee is now managing partner at the new entity, ASK Pravi Capital Advisors. The firm plans to raise #900 crore from domestic and global investors. To date, it has managed to raise half of its targeted quota for the domestic fund — #225 crore — and aims to raise the other half later this year with another $75 - 80 million from overseas investors. “We plan to do about 12 deals in four years. These will be in the range of #25 crore to #75 crore and would involve companies having a turnover of #50 -100 crore,” says Banerjee. Quite clearly, he knows the limitations of being a small fund. “We are obviously not in competition with large funds like Warburg Pincus and TPG. Our aim is to build our investee companies for a potential stake sale to larger players,” he points out. His past experience at ICICI Venture where he was involved in transactions in sectors like textiles, construction, aviation, infrastructure and logistics, will no doubt come in handy. Besides, he was closely involved in fund raising for the $810 million India Advantage Fund Series 2, which had a focus on buyouts and late-stage growth capital. Banerjee is clear about picking up at least 26% in investee companies. “More than a legal filter, we believe this is a psychological filter. It allows us to choose entrepreneurs who are seeking a partner and not a mere investor,” he says, adding that many of those companies will be ready to go public only after 10 years. There have been more than a few hard lessons learnt in fund raising. “In retrospect, we should have realised that just because international LPs [Limited Partners] say good things about you does not mean they will back their words with cheques. Fund raising can become a chicken and egg situation where one LP waits for another to take the lead,” Banerjee sums up. b

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cover story | PRIVATE EQUITY |

Manna? Not quite IS PRIVATE EQUITY THE LIGHT AT THE END OF THE TUNNEL OR THE HEADLIGHTS OF AN ONCOMING TRAIN? SRIVATSA KRISHNA, IAS

86

D

o you beat your wife?” The answer to that is pretty much similar to what you can expect if you were to ask someone in the Indian private equity (PE) industry, “Are your investments doing well?” No prizes for guessing how many general partners (GPs) in the Indian PE industry admit to beating their wives! The $24 -billion Dell mega deal is a welcome sign for the global PE industry, especially the buyout industry, but what about India, where buyouts are largely non-existent for regulatory and structural reasons, and which is almost completely a growth market? The Indian PE industry version 1.0 has been in existence for the past 10 -15 years and has been a tremendously mixed bag, a few spectacular successes and a multitude of also-rans and failures. It is led by some of the finest and brightest minds of India, who have a genuine passion to grow India Inc, but is also home to a handful of shady dealmakers, who want to get rich quick, breaking every law in the book in the process. The single biggest structural flaw, which has been exploited by both, unscrupulous entrepreneurs and their willing partners-in-crime aka GPs, is the famous “2/20” model, where the 2% annual management fee appears to be the incentive for many to do so. Given the perverse incentive structure, since the 2% is on the amount of committed capital in the initial five years of a fund’s life, there is tremendous pressure to “put money to work”. In other words, doing deals becomes much more 2 March 2013 / Outlook BUSINESS

important than doing “good deals”. One must not forget that a management fee of $4 million on a $200 million fund goes a very long way in India and skews the incentive structure a great deal. The attendant question is, are global PE funds diluting their standards of governance when it comes to deploying capital in India? Instead, limited partners (LPs) should explore a model where GPs — other than the top quartile ones — are paid a higher fixed compensation, reimbursement of actual office expenses and a higher carry, and perhaps do away with management fees altogether. This may not be the most popular suggestion for most GPs, but this is one way of separating the men from the boys. Second, the Indian PE industry is competing with a Sensex that is on fi re. It has moved to the 20 , 000 mark (up from 14,000 just five years ago) and frontline stocks are delivering high double-

digit returns to public investors. Most entrepreneurs, despite Sebi’s reasonably stringent disclosure norms, prefer the public markets, in part to eschew valuation tangles, which are the hallmark of many a failed PE negotiation in India. Third, if getting into “good deals” is hard in India, getting out of them seems even harder, with a lot of money chasing a few “good” deals — and thereby also pushing up valuations of companies. The Indian PE industry is in the grip of a severe exit phobia and recent liquidity has been discerning. Venture Intelligence reports that private equity firms obtained exit routes for their investments in 98 transactions during 2012 (including five via IPO s, 67 via M&A and the rest through public market sales). The volume of exits in 2012 was up almost 17% compared with 2011, thanks largely to a surge in the number of strategic M&A exits (up 71%) and secondary sales (up 60%). If Indian GPs are not returning capital and significant returns to their principals, the chances are bleak that India-focused funds or carve-outs will happen at all in Indian PE version 2.0. Fourth, there are reported and many anecdotal cases of corruption and “kickbacks” or “Day One Carry”, as one of the brightest Indian PE partners calls it. Of late, apart from Sebi, the Central Bureau of Investigation, Enforcement Directorate, Serious Frauds Office and the Intelligence Bureau have come across and are actively monitoring instances of high-end corruption, money laundering and violations of the US Foreign Corrupt Practices Act and the UK Bribery Act, which involve some of the best-known global PE funds, and are under active investigation today. The day the government issues formal notices to top PE honchos, and if it leads to convictions and arrest, it will be a rude wakeup call for the industry as a whole. I believe this should be welcomed, for this would, at a very early stage in the industry’s life cycle, stem the rot and expose those who receive kickbacks while deploying capital.

THE INDIAN PE INDUSTRY IS IN THE GRIP OF A SEVERE EXIT PHOBIA AND RECENT LIQUIDITY HAS BEEN DISCERNING

OPPORTUNITIES GALORE India is today a $1. 5 trillion economy and growing at around 5 - 6% in real terms. Capital-starved companies abound and there is a significant need for private capital. Which industries and sectors can PE legitimately hope to invest in and make money from? It is fashionable for many an investor to argue that they would like to avoid highly-regulated industries, often forgetting that the biggest discontinuities and, therefore, the biggest Outlook BUSINESS / 2 March 2013

87

cover story | PRIVATE EQUITY |

88

scope for rewards are also in such industries. What follows is an illustrative, not an exhaustive list. Healthcare and related service industries remain one of the foremost sectors to deploy capital, given that India’s spending on health is the second-lowest in the world at 0.9 % of GDP (only Pakistan spends less than India, and even Sub-Saharan Africa spends more). Further, private health insurance accounts for only about 1.2% of total health expenditure and about 15 -20 % of the population have some form of insurance. Of the total spend, about 58% is on in-patient care and medical tourism by itself will be a $2 -3 billion per annum market by 2012 -13. It is expected that about $70 billion will be spent over the next six years on about 90,000 beds and private hospitals are expected to grow at a CAGR of 15%. Above all, almost 90% of all private healthcare in India is in the unorganised sector. The challenge remains procurement of land; ramping up of bed utilisation; contingent liabilities on account of “free care” contracts if any, which are often loosely defined and deliberately so by the government; and inadequate talent acquisition due to shortage of doctors and nursing staff. Having said that, many hospitals such as Narayana Hrudayalaya and Vikram Hospital, have recently closed attractive deals with private investors. Specialised clinics in eyecare, dental care, fertility and geriatric care are the next big thing for the Indian PE industry to focus on. Specialty hospitals such as Confident Dental (which is also the single-largest manufacturer of the highest quality dental chairs in India and now high-end dental care), Craft IVF (whose success rates surpass even the famous Boston IVF and Bourn Clinic, which invented this life-transforming practice), and Skanray (the only US FDA-certified medical equipment manufacturer in India, which bought out the medical device arm of L&T recently) are being courted and wooed by several marquee funds in the hope of getting into the specialised side of the business at attractive terms. Infrastructure desperately needs big ticket equity but faces an unpredictable regulatory environment; cost overruns; coal block issues; right of way and land acquisition issues; definition and attendant legal problems while defining total project cost for viability gap funding; siphoning off equity via gold-plating and over-estimations; all of which make it not-too attractive a sector. To invest in infrastructure, PE needs to find entrepreneurs who are thugs enough to “manage the system”

but at the same time, not thugs enough vis-a-vis their own dealings with the fund. That’s like asking for a reformer and a Pope rolled into one. Likewise, flexible power companies, speciality beverages and bottlers, several customer-facing large-volume (not necessarily large-format) plays in the retail and food space, select e-commerce ventures with good track records, IPL teams, ports/shipping services companies, select NBFCs, coal washing industry, speciality chemicals, logistics/warehousing are all excellent potential sectors for investments. Every Indian IT company is almost a mirror-image of its closest peer and the industry would see in the decade ahead some distinct verticalisation and specialisation. A not-so-insignificant part of the problem is most firsttime entrepreneurs are intimidated by PE and do not quite understand how to handle it, and the fancy financial engineering that sometimes comes with it. Further many, but not all, PE fi rms are unable to successfully demonstrate their value addition to a hard-nosed Indian entrepreneur. Many entrepreneurs have gone on record that they would rather walk away from a private equity deal leaving money on the table, for they find many PE investors simply do not add the value they claim to add, other than bringing capital, and instead take away a disproportionate part of the profits. Last and most importantly, one of the biggest lessons of Indian PE 1.0 is that funds cannot outsmart the canny Indian entrepreneur and unless their interests are aligned from Day One, it is almost impossible for them to succeed. As several cases have demonstrated, the unscrupulous Indian entrepreneur can spin so many rings around the GPs that it will take them forever to free themselves. Also, there is a significant global reputational risk to the PE fund in such tangles, but not for the entrepreneur, for whom it is simply the “cost of doing business”, and the latter’s ability to live with uncertainty is far greater than that of any PE fund in the world! In sum, Indian PE 1.0 has not quite been the manna that it has been in its global avatar in delivering value and growing businesses. It has also been tainted to some extent by a handful of unscrupulous elements that are giving the industry as a whole a bad name. As Indian PE awaits its version 2 .0, LPs will be much more wary into putting money into them, and the forest fire of version 1.0 will hopefully clean up some of mess and allow for fresh growth to bloom. b THESE ARE THE AUTHOR’S PERSONAL VIEWS

ONE OF THE BIGGEST LESSONS OF INDIAN PE 1.0 IS THAT FUNDS CAN’T OUTSMART THE CANNY INDIAN ENTREPRENEUR

2 March 2013 / Outlook BUSINESS

c’est la vie THE GOOD LIFE Artist Sakti Burman is well known, even outside the country HIGH FIVE Kroll’s Reshmi Khurana on how to detect potential fraud in a company PURSUIT OF HAPPINESS Tommy Hilfiger’s Shailesh Chaturvedi is soccer crazy

| MY FAVOURITE | KS NARAYANAN, CEO, PAN INDIA FOOD SOLUTIONS SOUMIK KAR

I really liked The Men Who Changed the World: Stories of Invention and Discovery by Egon Larsen. It’s a book written in layman terms by an “academic non-performer” who documents the thought processes of great inventors. He explains how eureka moments came about, and what lay between inspiration and perspiration. This book contains truly uplifting stories of many great inventors, from their childhood onwards. Old is gold for me. My morning run at the Mahalaxmi Race Course is always in the company of the Kishore Kumar classics that I grew up with. They help me run the extra mile. In many ways similar to India, Sri Lanka has a small-town charm, with incredibly warm and friendly locals, pristine beaches and beautiful Buddha statues. Naturally, to a food aficionado like me, the exotic cuisine and flavourful food adds to the whole experience. Following and playing cricket has been a favourite since childhood but over the last few years, I have taken up running and I am now a regular at the annual Delhi and Mumbai marathons. The early morning run energises my day and keeps me going. It has to be Antoni Gaudi’s architecture. Known the world over for his Sagrada Familia, Parc Güell and La Pedrera, Gaudi’s designs have vibrant colour schemes and a structural presence that are in harmony with his unparalleled use of colourful mosaic stones. His brilliant blend of art, craft and science leaves me completely mesmerised. b

Outlook BUSINESS / 2 March 2013

89

c’est la vie | THE PURSUIT OF HAPPINESS |

ALL THE WO TOMMY HILFIGER’S SHAILESH CHATURVEDI IS A SOCCER

90

2 March 2013 / Outlook BUSINESS

ORLD IS A GAME FAN WHO CROSSES CONTINENTS TO WATCH HIS FAVOURITE TEAMS IN ACTION Lalitha Sridhar

S

ome people read and some people write books,” Shailesh Chaturvedi, MD and CEO, Tommy Hilfiger India, likes to say with quirky humour. “I’ve always been more a reader than a writer.” It’s not literature that Chaturvedi is referring to but sport. Two years ago, he and his son cheered themselves hoarse at a hugely exciting and rare event series just three days apart — the two La Liga classic face-offs between Real Madrid and Barcelona, the first in Madrid, followed by the drive down to Valencia for the final. “You can’t get better than that — 15 of those 22 playyears ago looking at TRPs of games like ers belong to world-leading teams,” the English Premier League that his Chaturvedi says with boyish enthusiasm. brand sponsored — and strategy became Before Spain, it was Chelsea versus passion. “Once I started watching the Manchester United in London, which game seriously, it was impossible not to Chelsea won 2 -1. It was get drawn into soccer.” an incredible experience Naturally, soccer transfor his 12 -year-old son, lates as inspiring pep talk Chaturvedi says, to watch at company presentahis favourite team win on tions since, “Soccer is also its home turf. “I can’t tell about team spirit and isn’t you how magnificent it is that what work is about?” at Madrid — the passion, Another example he likes FAVOURITE TEAM: the rivalry, the quality to give is that of the Real FC Barcelona of the game, the football Madrid manager, Jose culture, the rituals big Mourinho, who is, “highly FAVOURITE VENUE: and small. People bring talented no doubt, but his Wembley, London sunflower seeds in bags, ego becomes bigger than FIRST MATCH IN A break and eat them at the the team. We should nurSTADIUM: ManU vs match.” It was a posting ture talent instead.” Chelsea at Chelsea in Hong Kong and a lively Chaturvedi’s most cher‘soccer culture’ in his ished memory is the TFAVOURITE PLAYER: son’s school that sharpshirt every member of the Andrés Iniesta ened Chaturvedi’s hunger Real Madrid team, includfor the great game. They ing Cristiano Ronaldo and missed the World Cup Ricardo Carvalho, signed in SA but this May, the schedule’s been and gave his son as a birthday present cleared for the Champions League Final two years ago — which he has worn for — again in Madrid. every birthday since. “We’ll frame it Sport and work spill into each other efwhen he outgrows it,” says Chaturvedi fortlessly in the 44 -year-old Chaturvedi’s with childlike glee. “A wall in our home life. He first started out about 12 -odd has been left blank for it.” b

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S

akti Burman is drawing on a cloth napkin that we’ve purloined from the Novotel, Mumbai, the sweeps and strokes observed by a table full of women guests who will attempt to snog his effort once he’s done. They’re not getting away with it, though — that precious napkin also has drawings by his wife Maite Delteil and daughter Maya Burman, both acknowledged as artists to watch out for (and collect) in their native France as much as in India. (A signature by actor Katrina Kaif will make that napkin more precious — but about that, more later.) Sakti Burman, “head” of the clan, began his career in Calcutta, and though he has enjoyed heady success in India in, particularly, the last decade, he built an enviable reputation for himself in Paris, where his fine art prints at the start of his career were exhibited alongside those by Pablo Picasso and Marc Chagall. However, it was his “marbling” style, mixing water with oil to create a mosaiclike background reminiscent of the ancient frescos in Italy, that made 2 March 2013 / Outlook BUSINESS

him stand out. That and his ability to create enchanted gardens where figures of friends, family, gods and goddesses and mythological beings result in idylls almost of paradise. His wife, Maite Delteil, dwells in a somewhat similar idyllscape, but there is no magic realism at play here. Instead, she captures everyday scenes, often around beautiful gardens with flowers, trees and birds, where lovers or families abound. The approach has a Western formalism, but it is also playful, an element their daughter Maya Burman has seized upon. “She had been far more influenced

1: Paresh Maity’s Life is a Full Circle; Mixed media on paper 2: Maite Delteil’s In the Garden; Oil on canvas 3: Sakti Burman’s Happy Soul; Oil on canvas 4: Maya Burman’s Untitled; Watercolour on paper 5: Jayasri Burman’s Gonga-Ma; Watercolour, pen and ink on board

ENS OF ART A CLAN OF ARTISTS ENJOYS POPULARITY ON AN UNPRECEDENTED SCALE

Kishore Singh

THE BURMAN-MAITY COLLECTION If you’re a collector just starting out, you could do little better than to begin with their drawings — which, at #2 lakh for Sakti Burman and #1 lakh each for Paresh Maity and Jayasri Burman, will not put you out. But if you’re into more serious art, Sakti Burman is at the top of the heap with small canvases starting at #5 lakh and ending upwards of #1 crore.

 

Jayasri Burman and Paresh Maity are popular with collectors who prefer a strong aesthetic, and while Paresh’s entry level prices for smaller canvases are higher than those of Jayasri’s, as the size increases, their values begin to parallel each other at about #1 lakh per square foot. Both also work on sculptures and installations that can be priced between #15 lakh (Jayasri) and #40 lakh (Paresh) to #1 crore. Maite Delteil has not exhibited in India for a while but seems to do better in Mumbai than in Delhi, her prices varying from #1-2 lakh to about #20 lakh, while Maya Burman’s cherubic figures begin around #50,000 and are about #10 lakh at their highest. The artists are represented in India by Art Alive Gallery, Gallerie Nvya, Gallery Ganesh, Art Musings, Sumukha and Apparao Galleries.

by her father earlier,” shares an analyst, “but in recent times, she appears to be drawn to her mother’s use of primary colours.” If anyone is adhering closest to the path set by Sakti, it is his niece Jayasri Burman — even though from medium to style to subjects (entirely based around Indian mythology), hers appears to be a departure. Instead of being placed randomly, her figures occupy the centre stage. But in creating something that is fantastic — swans emerging from a goddess-like figure’s hair — she is more akin to her uncle’s work than that of her husband, the maverick Paresh Maity, who is primarily a colourist (shades of Maite) and arguably India’s greatest watercolourist. That he visited Sakti Burman’s studio in Paris during his first European outing and long before he knew Jayasri merely intertwines their fascinating careers together. Paresh began his career making watercolours — a medium that continues to fascinate him, and to which he returns intermittently — but it is his canvases with their primary colours and portraits (and occasionally landscapes) that continue to be his biggest market. While Jayasri has in recent years experimented with sculptures, Paresh has been there, done that, and moved on to working more in the installation space. Both have a growing number of dedicated collectors all over India, part of the West as well as in South-east Asia. They move seamlessly to create works in which one artist’s magically drawn figures join effortlessly with the others’ — creating such a tapestry on a napkin on a dinner table on one such outing in Mumbai. Katrina Kaif should consider herself lucky that she got to sign it, even though it was I who got to keep the “artwork”. b THE AUTHOR IS A DELHI-BASED WRITER AND CURATOR Outlook BUSINESS / 2 March 2013

95

c’est la vie | HIGH FIVE |

“Unacheivable targets could be a sign of stock manipulation” RESHMI KHURANA, INDIA HEAD, KROLL ADVISORY SOLUTIONS, ON HOW AN INVESTOR, CREDITOR OR AUDITOR CAN DETECT POTENTIAL FRAUD

1

TOO GOOD TO BE TRUE: Financial statements of

2

UNEXPECTED EXITS: Key company officials have

3

RED FLAGS: Allegations or red flags received via

4

INTERNAL AFFAIRS: The company’s internal

5

OVERBLOWN TARGETS: The company has overly

the company appear too good to be true when compared with the performance of its competitors and economic conditions. The management could be under pressure to paint a rosy financial picture to prevent a corporate takeover or for personal benefits.

suddenly resigned or departed without sufficient reasons. Sudden selling of bulk stock by promoters is equally disconcerting. These could be signs that the management expects the performance to deteriorate and doesn’t intend to take responsibility for it.

96

the whistle-blower hotline and other modes of communication are repeatedly ignored. This suggests that the senior management may not be serious about addressing potential fraud in the company and may be complicit in it.

control framework is weak, which includes a lack of segregation of duties, and the absence of a code of conduct, whistle-blowing mechanism and internal audit function, or the company is not audited by reputed external auditors.

aggressive targets for sales and earnings per share, and has expansion plans that are not in line with its performance and the industry. Apart from looking at its past record, the company’s projections also need to be analysed — unachievable targets could be a sign that it might be trying to manipulate its share price, or it’s trying to attract investors. b SOUMIK KAR

2 March 2013 / Outlook BUSINESS

54 22,000 70 GALLERIES – PART OF DUBAI’S VIBRANT ART SCENE

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