For PE firms, energy is a red-hot pick

This story first appeared in DNA Money edition on Saturday, October 8, 2011.

The energy sector has attracted maximum investments from the private equity players during July-September, the third quarter of calendar year 2011.

Of the $2.25 billion worth PE placements across 98 deals in Indian companies during the quarter, about $823 million, or 37%, was in 16 energy-sector companies, according to data by Chennai-based research firm Venture Intelligence.

Vikram Uttam Singh, head-private equity, KPMG, said, “We saw deals of close to $5 billion in the energy space last year and what is happening now is an extension of it. One of the reasons for this is that until recently very few deals of this size were available in the market. Power industry is very capital intensive and hence the deal sizes tend to be huge,” he said.

Among some of the largest investments in the quarter are The Blackstone Group-owned Sithe Global Power’s around Rs1,280 ($261 million) investment in SKS Chhattisgarh Power Generation, Blackstone’s direct Rs500 crore ($111 million) investment in Visa Power and Goldman Sachs’ Rs1,000 crore ($204 million) commitment to ReNew Wind Power.

Industry experts said that increased traction in the energy space is also because most companies are adopting the cluster approach to fundraising (seeking investments in multiple assets) as compared to a single asset approach earlier.

“If you look at fundraising done by players like GMR and Sumant Sinha’s ReNew Wind Power these are all cluster transactions,” Singh said.

Also, unfavourable primary market is another reason for promoters to turn to PE firms. Interestingly, despite bad market conditions, energy companies are getting fairly good valuations from PE firms, which is visible in the number of deals getting closed, an expert said.

“A non-conducive market environment generally tends to favour the PE companies owing to discounted valuations. However, from the current deal momentum, there appears to be meeting of minds between the investor and the investee over valuations, which is good for others looking to raise PE money,” said a top official from an international investment advisory firm.

According to a KPMG paper on power sector last year, India has the fifth largest generation capacity in the world with an installed capacity of 152 GW as on 30 September 2009, which is about 4% of global power generation.

A recent news agency report cited that India has a peak-hour power deficit of about 14% and that the renewable sector comprises 6% of the total power mix.

Among other sectors that topped the PE wishlist included information technology and IT-enabled services, which was the second largest sectors attracting $437 million across 29 transactions. SoftBank’s $200 million investment in mobile advertising network InMobi was the largest deal in this space, followed by the $40 million raised by online group buying service Snapdeal.com from Bessemer Ventures with participation from existing investors IndoUS Ventures and Nexus Venture. Also Blackstone invested about $33 million in financial inclusion-focused tech firm Fino.

Interest in infrastructure firms operating in the roads and water projects helped the engineering and construction industry attract $279 million in eight investments across companies such as Soma Enterprise, HCC Concessions and GVR Infra Projects.

However, the PE investment during the third quarter was lower than the same period last year ($2,357 million invested across 111 deals) and also the preceding quarter ($2,911 million across 122 deals).

We will help IIFL expand overseas: Carlyle MD Devinjit Singh

Devinjit Singh

This Q&A first appeared in DNA Money edition on Thursday, October 6, 2011.

Devinjit Singh, managing director, The Carlyle Group, speaks about the latest transaction and PE firm’s investment strategy going forward. Excerpts:

Could you tell us what really led to the investment in IIFL?
The big driver for us was the management as we have known them for sometime now. We were very impressed with what they have done. They have a leadership position in the retail brokerage side and have been able to attract team from the likes of CLSA and have launched into institutional brokerage segment. The company also has a leadership position in the insurance brokerage and wealth management space. What is equally importantly is that they are looking to transform themselves into a diversified financial services company. The IIFL management also felt this is an area we could help and add value to their business. That’s the key reason they have invited us to join the company board and support their growth plans. It was a meeting of minds in that sense.

How is Carlyle looking to benefit from this investment?
We like the sector a lot. We have an investment in HDFC and now in India Infoline. This gives us a broad exposure to the Indian consumer. We believe strongly in the overall India growth story and financial services sector is the best way to play. We will continue to deploy capital in the sector.

Are there any specific expectations from IIFL post this investment?
We are fully aligned in terms of their strategy and our role is really to support the management.

IIFL wants to explore international markets and sees the Carlyle association as a key catalyst...
They have entered the Singapore market where we have some presence. They have presence in Sri Lanka where we are not that strong yet. This apart, we will be helping them with their investor base which is largely international. Those are some of the areas where we will be of assistance to the company as far as overseas penetration is concerned.

What would be Carlyle’s investment horizon specifically with private investment in public enterprises (PIPEs)?
Our investment in HDFC was a PIPE and it’s over four years now. So give and take a few years here and there, we will look at a 5-7 year horizon for such investments.

What are your views on the recent development from the Sebi to regulate alternate investment funds?
It is very limiting in nature. Our investors give us money to find good deals. They don’t really care if the companies are listed or unlisted, infrastructure or non-infrastructure, minority or majority and so on. And at different points of time different deals become interesting, like you pointed out that the current market looks good for PIPEs. Similarly, there would be times when private deals would be better so we need that flexibility. And some of the points outlined by Sebi will make things very restrictive for our business.

What are your plans in India?
We are committed to our investment plan in India. We go through phases where we don’t invest at all, like the case has been in last couple of years. The reason being, we thought the framework wasn’t conducive to our investment. But now we do think that things are moving and if the right opportunity comes we will certainly be committed to making investments.

Carlyle picks up 9% in India Infoline

My colleague Sachin Mampatta co-authored this story, which first appeared in DNA Money edition on Thursday, October 6, 2011.

The Carlyle group, which manages Rs7.55 lakh crore worth assets globally, has picked up a 9% stake valued at Rs192 crore in brokerage and financial services firm India Infoline (IIFL).

The stake was picked up over the last few weeks from the open market, according to a Carlyle spokesperson. The private equity firm would get a seat on the board of the company, said a joint-note on the development.

“Carlyle becomes a key institutional shareholder in IIFL and will be invited to join IIFL’s board of directors to support its future development, subject to necessary approvals,” it said.

Talks of a stake sale to a foreign entity have been doing the rounds for over a year. IIFL chairman, Nirmal Jain, dismissed speculations of a total promoter sell-out, terming them “baseless”.

He said there was no change in the promoter shareholding. There have also been no discussions for any additional stake sale, although the Carlyle remains free to pick it from the open market, Jain said.

As per the current stock price, Carlyle’s 9% stake is worth Rs192.15 crore.

“We bought around 6.5% stake a few weeks ago and then increased it gradually to the current 9% levels,” said Devinjit Singh, managing director of The Carlyle Group.

IIFL said the acquisition would help it expand overseas.
“We hope to leverage our relationship with Carlyle to continuously grow and expand internationally,” said Jain.

The investment was made by Carlyle Mauritius Investment Advisors Ltd, a part of Carlyle Asia Partners, which has made investments including HDFC in India.

Carlyle has invested more than $2 billion (Rs10,000) in Asian financial services businesses.

The IIFL stock was up 1.95%, closing at Rs70.75 at the end of trade on Wednesday.

The Sensex, whose movements reflect the broader market trend, was down 0.46%, closing at 15792.41.

Essar Oil set to complete Vadinar Phase I spread by December

This story first appeared in DNA Money edition on Wednesday, October 5, 2011.

Essar Oil is all set to be the second-most complex refiner in India after Mukesh Ambani’s Reliance Industries.

Growing at a compounded annual growth rate of 27%, Essar Oil is targeting to build overall capacity of 711,000 barrels per day (bpd) by March 2012 and will enhance it to 7,41,000 bpd by March 2013.

Reliance currently boasts of 1.24 million barrels per day (bpd) of crude processing capacity, the largest at any single location in the world.

Naresh Nayyar, chief executive - Essar Energy and managing director - Essar Oil, was not available for comments.

However, responding to DNA queries on capacity addition, a company spokesperson said that new capacity in the current fiscal will come from completion of Phase I at Vadinar Refinery in Gujarat (75,000 bpd) and Stanlow refinery (296,000 bpd).
The Vadinar optimisation exercise will give it an additional 30,000 bpd to be achieved by March 2013.

The company’s Phase I expansion plans at the Vadinar Refinery in Gujarat is on track and is expected to be completed by December. According to the company spokesperson, this capacity addition is being made at an overall cost of `8,600 crore funded through a mix of debt and equity.

“Vadinar refinery Phase 1 expansion project will increase production to 375,000 barrels per stream day (bpsd) from 3,00,000 bpsd and, more importantly, increase complexity significantly. The increased complexity means that the refinery can increase the proportion of heavy and ultra-heavy crude that it processes, and produce a higher proportion of middle and light distillates,” the spokesperson said.

Analysts tracking the sector said the new capacity will make Essar Oil the second-most complex refiner in India.

Saurabh Handa and Garima Mishra, analysts with Citi Investment, Research and Analysis, in a recent company report, said, “Besides an approximately 30% increase in capacity, the expansion would also increase Essar’s complexity to 11.8 from 6.1 currently, making it the second-most complex refiner in India after RIL.”

Industry experts also believe that completion of the Phase I project expansion will be a key driver of superior gross refinery margin (GRM) and profitability going forward.

Dikshit Mittal, analyst - oil and gas, SBICap Securities, said that refining margins have been on an uptrend and current refining margins ($9/bbl) are close to three year high.

“Strength in refining margins has been higher, mainly owing to increased gasoline margins. However, going forward the margins are likely to witness some pressure as the market situation in the west especially the US is not looking very good. In case US slips into recession, refining margins may come off substantially next year,” said Mittal.

Another Citi analyst, Oscar Yee, sees a slight pullback in 2012 as refining demand and supply delta is likely to turn slightly negative next year, based on Citi’s revised global oil demand forecasts (+1mm b/d p.a. in 2011-12E).

The concerns over a global slowdown, according to Yee, would hurt Europe / US refiners more as industry utilisation in Asia would remain relatively stable at 83-84% in 2012-13.

“We expect the next cyclical downturn to arrive only in 2014-15 with Middle East and China greenfield projects starting up. Overall, we forecast regional GRMs to drop slightly by $0.5-1.0 in 2012,” said the Citi analysts.

Intel Capital doesn’t see a flurry of exits in 2012

This story first appeared in DNA Money edition on Saturday, October 01, 2011.

Intel Capital, the global investment arm of chip giant Intel, is bracing for a slower exit pace for its investments in 2012.

Citing liquidity concerns, Sudheer Kumar Kuppam, managing director - India, Japan, ANZ and SE Asia, Intel Capital, said there are too many issues hovering global economic outlook.

“Until we see a solution for some of the issues, 2012 will probably be a little softer on the exits front,” he said.

“In the emerging markets one of the significant trends we have seen over the past few years is that most of our exits have been through an initial public offering (IPO). In the developed markets though, merger and acquisitions (M&A) have been the key mode of exit,”Kuppam said.

As far as overall exit pace for 2012 is concerned, it will be slower, mainly owing to the equity market situation which will not be very conducive for companies going public, he said.

In such a situation, the only fall-back options that venture capital and private equity (PE) firms will have are M&As, followed by secondary transactions (one investor selling to another), which will make for a significant part of exits next year.

“It is very unusual in the PE space that a single mode is used by investors to exit their portfolio companies. Rather, it is always a mix of IPOs, M&As and secondary sales. As far as buyback or put option is concerned, it is typically not pursued because one would always want to generate a decent return on investments which is not possible in case of a buyback,” said a top official from an investment advisory firm.

In 2011, Intel Capital exited 24 investments (4 IPOs and 20 acquisitions) globally, of which one was in India — HelloSoft Inc (which has a R&D centre in Hyderabad) was acquired by UK-based Imagination Technologies Ltd. Till December, the investment firm foresees another possible exit from one of its Indian portfolio companies — MCX — which has got Securities and Exchange Board of India’s approval for listing on the bourses.

“We are hoping it will happen despite unfavourable market conditions and most probably before the end of the year,” said Kuppam.

In another development, Intel Capital announced investments of $20 million across six companies, including FINO, which, in July 2011 received a `150 crore from The Blackstone Group.

With just 20% of the $250 million India Technology Fund left for deployment, Intel Capital is likely to go for its second India focused fund towards the end of 2012. “In 2010 we invested around $45 million while in 2011 year-to-date (YTD) we have done $38 million. We are roughly investing around $45-50 million every year. We still have enough to invest for another 12 months, so the new fund raising would only happen by end of next year,” he said.

The investment firm is not worried much about the non-conducive environment wherein a lot of new and existing investment firms are having a tough time attracting investors in their respective funds, popularly known as Limited Partners (LPs).

Kuppam said Intel is bullish o India for investments. “This is mainly because of the growth profile and huge opportunity with a lot of upside especially in the information technology space which is our focus area,” he said.

Zee Learn plans to set up 500 K-12 schools

This story first appeared in DNA Money edition on Friday, September 27, 2011.

Zee Learn Ltd, which has established KidZee as the largest pre-school chain in India with over 900 centres, is set to become the largest operator of K-12 (kindergarten to XIIth standard) schools in the country.

Its K-12 vertical under the Mount Litera Zee School banner is targeting 400-500 schools across the country in 5-7 years.

The schools will be set up largely through the franchisee route while a considerable number will be management contracts and owned and operated institutions.

Sumeet Mehta, CEO, Zee Learn, said there are currently 42 operational schools with another 70 in the pipeline.

“Next year we will add 24 schools followed by 35 more the year after. In terms of signing the projects, we should cross 100 schools by next month. The plan is to add 30-40 schools every year under franchise system,” said Mehta.

Zee Learn has also signed two management contracts to brand and operate educational institutions under Mount Litera banner.

“We began with two schools this year but we think this is going to be a significant part of the portfolio,” he said.

The company is also putting up own schools investing proprietary money in the land, building and related infrastructure.

It is setting up six schools that are designed to be centres of excellence. “The approved projects are in various stages of development. The projects are coming up in Punjab (2), Haryana (1), Maharashtra (2) and Goa (1). Each of these schools will require an investment of Rs30-40 crore,” Mehta said.

While the current revenue contribution from schools is not huge, Mehta said the installed capacity is such that it already ensures a significant level of revenue growth in the coming years.

He said putting up an owned school is a real estate project in the first three years at least after which it takes the shape of an educational project.

“Currently, we are in the real estate phase. Our belief is that schools are for the next generation and hence people need to be patient if they are getting into this business. The first 6-7 years will be used largely to pay off all the debt on the books and thereafter it will give an internal rate of return of 25% annually till perpetuity,” he said.

Zee Learn’s pre-school segment is growing at a compounded annual growth rate of over 25% annually and the company plans to add over 100 pre-schools annually through the franchisee route. “Last year we added about 175 centres and are expecting to do a similar number if not more,” he said.

The company’s revenues primarily come from pre-schools wherein KidZee business model is such that every time a centre is signed, Zee Learn gets some revenue and as children enrol, the company gets a percentage of the fees. As a result, the KidZee revenues continue to grow based on the number of new centres.

“Last year while consumers spent around Rs150 crore on Zee Learn, we booked net revenue of around Rs45 crore. This is because in the franchisee system we only book our share and not the total system revenues. Of the total net revenues, around 65-70% came from KidZee,” Mehta said.

For the upper tier of consumers, the company is creating another chain of schools branded as Mount Litera World School and a pre-school equivalent of it called as Mount Litera World Pre-School.

The first project is coming up at Bandra-Kurla Complex in Mumbai and being developed over 1.4 acre with a state-of-the-art infrastructure and facilities. Admissions at this facility are likely to start in 2013.

“It will be an integrated education complex comprising school and media management training institute. The cost of developing this project is envisaged to be in upwards of Rs50 crore,” he said.

Zee Learn recently got a shareholder approval to raise long-term funds by issuance of equity and / or equity linked instruments from domestic or international capital markets up to the value of $60 million. The money will very likely be used towards expanding the owned and operated K-12 schools and Mount Litera World Schools.

The company is looking to replicate the Mount Litera World School model in cities like Bangalore and Delhi and a few other markets depending on the demand.

The company has added a new vertical called School Solutions with the idea of making a significant impact on education and human capital with the existing 1.1-1.2 million government schools across the country.

Under this, Zee Learn will work with the schools to enhance education quality and is developing a teacher training programme. The company has already signed up 100 schools thus far and expects to add over 50 schools every month.

Mehta said the company had done a research over the last six months across schools in the country and the teacher training programme is being designed keeping in mind the existing gaps as well as the future skills requirement by the faculty.

“We are trying to create a more sustainable teacher engagement programme that addresses real needs. Things like how to manage a class, how to work with the new generation of children who are growing in a world which is so different from what it was earlier,” he said.

“The children who are coming to our schools will graduate in 2030 and nobody really has a clue how the world will be two decades from now. We need to create teachers who can actually relate to this generation and get them ready for that future. If you look at the B.Ed programme, its core has not really changed despite attempting to make it a two-year course. Children are living in a media-rich world and are expected to learn in a chalk and talk classroom,” said Mehta.

Among Zee Learn’s new initiatives with the objective of bringing together the community of educators, policymakers and key influencers from India and abroad is an annual property called the MLZS Future of Education Summit 2011.

“This summit is dedicated to the evangelisation of the education fraternity, students and parents alike and brings about a marked change in the perception and execution of educational systems and methodologies in India. Breaking from traditional moulds and methodologies forms the fulcrum of the programme and that was aptly demonstrated in the various activities conducted at an inter school meet organised by the school,” said Mehta.

Post Suzlon, Sumant Sinha gets Goldman cash to reap the wind

This story first appeared in DNA Money edition on Tuesday, September 27, 2011.

In what can be called as the largest investment in India’s renewable energy generation sector, US investment bank Goldman Sachs has put Rs1,000 crore into ReNew Wind Power, floated by the former chief operating officer of Suzlon, Sumant Sinha.

Sinha, who is the chairman and CEO, ReNew Wind Power, said, talks with Goldman has been on for a few months and “the company is fortunate to have closed a deal of this nature in such a market situation.”

“The market volatility in the last couple months didn’t help the process but I must say that Goldman Sachs continued to show confidence and reposed faith in the company, sector and the Indian economy as such,” Sinha told DNA.

Goldman, which will have majority stake in the venture, also has excellent domain knowledge, having invested in US-based Horizon Wind Energy which was successfully sold to a Portuguese power firm, Sinha, son of former finance minister and BJP member of Parliament Yashwant Sinha,pointed out.

“They also have an investment in a wind turbine company in Germany called Nordex AG. All this really helped us to cut short the time required for initiating and closing the deal,” he said.

SaVant Advisers, a firm headed by Sinha’s wife Vaishali Nigam Sinha, was the exclusive financial advisor to ReNew Wind Power for this deal.

On the business front, ReNew has signed business framework agreements with Kenersys GmBH, Regen Powertech Pvt and Suzlon Energy Ltd to establish and operate wind farms throughout India. The company is looking to expand its wind portfolio by over a few hundred megawatts annually.

“We currently have 85 mw (a 25 mw wind farm in Gujarat and 60 mw wind farm in Maharashtra) that is under construction. Starting December the development will get commissioned and is likely to get over by June 2012. In addition, we are looking at numerous other sites for expansion. Our expectation is that we should be finalising some of these sites for implementation in the next financial year as we go forward. Our intention is to do 200-300 mw every year, in such a way that we can target a capacity of 1 gigawatt by 2015,” he said.

Reaching the target, Sinha feels, will depend on the quality of projects the company will source and get. And if the company doesn’t get the kind of hurdle rates as per plans, it will then look to calibrate downwards in terms of the speed of rollouts.

“We want to grow faster and if we get good opportunities in terms of consolidation and acquisition then we are definitely open to looking at those. The good news is that we have got enough liquidity (equity funding from Goldman Sachs) and future funding requirements will hopefully be available from the same source or some other sources. It puts us in a very good position as a management team, not to have to worry about where our next equity funding is going to come from. Thus, all our energies can be focussed on the business and charting out its growth. We are now among a handful of companies with access to this kind of capital in the renewable energy space,” he said.

On their plans with respect to inorganic expansion, Sinha said, “I can’t give you a view on that as yet. All I am saying now is that we are open to it and if there are such opportunities we will look at them opportunistically and pursue them provided they meet our requirements and quality targets. We have not zeroed in on a specific corpus for that.”

Considering fund raising eats up a huge amount of time, Sinha is not looking to go for another round anytime sooner.

“I am quite happy not to do that for as long as possible. The current commitment (from Goldman Sachs) is good enough to meet our requirements for the next two years. Perhaps after that we might look at further funding. But like I said earlier, it will all depend on our speed and pace of rollouts,” he said.