L&T stuns St, says competition hot as orders vanish

This story first appeared in DNA Money edition on Saturday October 22, 2011.

Larsen & Toubro (L&T) on Friday cut its order growth guidance to 5% from the 15% it had envisaged at the beginning of this fiscal, citing a slowdown in investment momentum and cut-throat competition for orders.

R Shankar Raman, chief financial officer, L&T said the reassessment was necessitated as decisions related to new projects were being deferred. “At the moment, our best guess is that the conditions are going to remain as challenging as they are today and it is quite likely that the growth will be around 5% rather than the targeted 15% earlier,” he said.

The engineering and construction industry has seen considerable slowdown in investment momentum in the last 6-8 months.
Adding to the troubles is the competitive business environment wherein fewer projects are coming up and as such are being fiercely fought for.

“As a result, win rates are dropping for all the participants in the sector and L&T is no exception. Considering this situation and the policy initiatives that are required to be taken to fast-track some of these investment programmes and the confidence that has to be re-found in the business community, we do think we will lose much of the remaining six months in this process of discovery,” said Raman.

As for the engineering and construction behemoth’s revenue growth outlook of 25% for this fiscal, the management said revenue visibility was better than accretion in the order pipeline since 82% of its revenues came from the order backlog.

“Our assessment tells that we should be able to maintain the guidance in so far as the revenue is concerned. The 15-18% of fresh orders that we were banking on to be able to get the revenues up to its full 100% level, despite the correction in the order inflow that we are accessing today, we think should survive. Hence, our assessment now is that the revenue guidance should stay,” said Raman.

For the quarter ended September, the management said new orders fell 21% to `16,096 crore while the total order book was at Rs142,185 crore. Net sales for the quarter were up 19.3% at Rs11,245 crore, while net profit rose 15% to Rs798 crore, including extraordinary gains of `70.8 crore from sale of shares in Mahindra Satyam.

Finally, tipping point for cable TV

This story first appeared in DNA Money edition on Friday October 14, 2011.

A paradigm shift is nigh for India’s television distribution industry, where for years unscrupulous local cable operators have under-declared subscriptions, causing huge revenue losses to broadcasters and platforms.

Over the last five years, while direct-to-home (DTH) has flourished in an environment of voluntary digitisation with around 35 million subscribers, digital cable has stayed laggard.

“The pain in digital cable has only further intensified in the last 9-12 months, when multi-system operators (MSOs) such as DEN and Hathway have added less than 0.5 million subscribers in spite of being adequately capitalised. The ‘hope’ of the regulatory support was a critical reason for this delay,” said Nikhil Vohra, managing director, IDFC Securities Ltd.
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Interestingly, of the 225 million-or-so households in the country, an estimated 20 million are in the metros covered in Phase-I of the digitisation ordinance issued on Thursday.

The rural skew also shows in the DTH pie, with only 9 million out of a total 35 million subscribers from urban areas.

Among other players, Dish TV is expected to extract a sizeable pie from the metros in a mandatory digital environment. Nationalised MSOs such as Wire and Wireless (WWIL), DEN and Hathway are also likely to see sharp increases in their delta gains.

Dish and WWIL are Zee Group companies, which also co-owns Diligent Media Corporation, which publishes the DNA.

“Against a backdrop of extremely poor execution and muted subscriber addition of less than 0.5 million subscribers annually, we now foresee a near three-times jump in digital subscriber addition in the next 12-18 months. This will ensure a sticky base for MSOs ready to monetise,” said Vohra.

“It’s not that companies were not investing into the business earlier,” said, Smita Jha, consulting head - entertainment and media, PwC. “They never had a say as the end-user was free to choose between analog and digital cable, which will not be the case now thanks to mandatory digitisation with defined timelines,” she said.

Locals forced to digitise; better Arpus
Local cable operators (LCOs), which had limited incentive to digitise or partner with MSOs earlier, will now be compelled to undertake digitisation.

“With limited access to capital as also ability to digitise their own network, LCOs are now bound to partner with MSOs. This, coupled with digitisation with addressability, will lead to addressal of the biggest bane in the cable distribution industry — under-declaration (of subscribers),” said Vohra.

Both DTH and digital cable operators will benefit as DTH companies were earlier competing with analog cable operators owing to lower average revenue per user (Arpu) on cable networks. “The Arpu was in the Rs 100-200 range. As a result, DTH companies could not increase their prices. Digitisation would lead to an increase in cable operator and DTH Arpus. It’s a win-win for everyone. While set-top box prices at Rs 1,000-1,200 may look on the higher side in case of digital cable, these prices are declining and will come down further in the coming years. This will be a key factor for digital cable operators looking to grab market share in non-metros, the deadline for which has been set for 2013 and 2014,” said Jha.

Consolidation ahead
Once the key metros get digitised, there will be some amount of transparency in the market in terms of revenue declaration, which will instill confidence in the investor community to participate in the fundraising plans of various players in the industry.

Keeping in mind the funding requirement, a proposal to increase foreign direct investment (FDI) limit in the C&S industry has been mooted already. Once the Cabinet approves a hike in FDI limit to 74% from the current 49%, experts feel it will lead to realignment of the cable and satellite business, spurring mergers & acquisitions.

From a consumer perspective, digitisation will make cable more competitive vis-a-vis DTH.

Now order a pizza on cable
For one, cable would have an interactive two-way communication system and hence a lot of value added services (VAS) which are not possible on DTH.

How about ordering a pizza over cable and receiving a confirmation from the pizza guy, for instance?

There would also be other VAS offerings like digital video recorder, pay per view, broadband internet and IPTV, bringing cable on par with DTH.

The monthly outgo, in addition to purchasing set top box, is likely to remain the same for a bulk of consumers, though it could be higher for those opting for expensive pay channels.
To a large degree, therefore, it will come down to quality of picture and programming, availability of channels, value-added services and of course pricing of the services which is key driver in a country like India.

More capital needed
On the flipside, for the cable operators, the mandatory digitisation will increase the capital requirements.

According to Jehil Thakkar, head media and entertainment practice, KPMG, all the cable companies will now have to think about where the funds are going to come from —- internal accruals, fund raising or take on debt, etc.

“We have estimated overall capex (entire infrastructure cost including set top box and optical fibre cable) for the industry to be around Rs 20,000 crore in the next 3-4 years. Given the state of the market, companies will have to raise money either through private equity or debt while some of the public ones can explore market-based options,” said Thakkar.

Interestingly, while DTH players like Dish TV and Reliance TV already have separate entities —- Wire and Wireless and Digicable, respectively —- to address the cable TV market, there is a possibility of other players also adding cable operations to their business. “This approach will broaden their offerings for the different geographies/ markets in addition to building on the competitive advantage. This could happen through both organic and inorganic routes,” said Thakkar.

Players cheer
Dish TV has hailed the move as a positive one. “This ordinance will certainly help the DTH industry much more than other forms of distribution,” said Salil Kapoor, COO, Dish TV India, adding that DTH has emerged as the platform of choice across all population and socio-economic strata.

According to Sudhir Agarwal, CEO, WWIL, the entire cable TV universe will be converted to digital homes, thus reducing under reporting, bringing in transparency and resulting into boost in subscription revenue.

“Digitisation of existing cable infrastructure will augment the channel carrying capacity, offer better quality and will provide further scope for delivering various value added services. A multi-fold increase in subscriber number is expected. Such exponential growth in subscriber numbers requires huge infrastructure to serve them as well, for which WWIL is well positioned.

M G Azhar, president - strategy and business development, DEN Networks Ltd, feels the initiative will create a paradigm shift in the pay distribution industry and alter the fundamentals of the media sector. “The transition will see the entry of more channels, the spread of broadband and triple play offerings and ultimately a transformation in how households consume content and entertainment in this country,” he said.

Harit Nagpal, CEO, Tata Sky, said it will help transform the sector into an organised industry. “It will aid the organisation of the Industry and result in clearer subscription figures for broadcasters,” he said.

Cabinet nod for full digitisation of cable services

This story first appeared in DNA Money edition on Friday October 14, 2011.

Cable television services in towns and cities across the country will go completely digital in the next three years, the government said on Thursday. The cabinet committee of economic affairs has cleared a proposal for digitisation of cable services in all metros by 2012 and other urban areas by 2014, information and broadcasting (I&B) minister Ambika Soni said.

At present, while there are several direct-to-home and multi-system operators in the urban areas, analog systems also abound, leading to issues of transparency and control.

The ordinance will allow the I&B ministry to insert a clause in section 4A of Cable Act, thereby making a digital addressable system mandatory in the cable sector. This will have to be done in four phases as recommended by the I&B ministry and the Telecom Regulatory Authority of India.

"Cable operators will have to abandon analog in the four metros by March 31, 2012. Cities with a population of one million will be covered by March 31, 2013. All urban areas would be covered by September 30, 2014. The entire country will be covered by December 31, 2014," said Soni.

The ordinance will now pass through the law ministry to the president for a final signature, post which it would be ratified by Parliament within six months.

The cable and satellite television industry has hailed the initiative as a game-changer.

Mandatory digitisation is expected to reduce revenue leakage in the system where the level of under-declaration of subscribers and revenues is said to be as high as 80%. With compulsory digitisation, errant operators can no longer fake the numbers.

Experts feel the initiative is a win-win across the value chain. Cable operators benefit as capacity constraints are removed and they are able to offer more channels by going digital, thereby boosting subscription revenues.

Additionally, they get to offer a host of value added services such as movie-on-demand, electronic programming guide, internet and high-definition channels as additional revenue streams.

For the broadcasters, on the other hand, the initiative means a reduction in the carriage fees they need to pay cable operators to ensure their channels are beamed in a certain locality.

As for the end-consumer, there is an assurance of greater variety and better quality of content. Indeed, it is likely there would be an explosion of channels as even niche plays become viable.

WNS lines up FPO, most likely to facilitate Warburg’s exit

This story first appeared in DNA Money edition on Thursday October 13, 2011.

WNS, the New York Stock Exchange-listed business process outsourcer, has filed a shelf registration statement with the Securities and Exchange Commission (SEC) to offer and sell up to $50 million of ordinary shares/ American depositary shares (ADS).

That could give private equity major Warburg Pincus a chance to exit its majority shareholding in the company.

The sale could be done in one or more offerings, WNS said in a statement.

Shelf registration is a regulation that a corporation can evoke to comply with SEC requirements for a new stock offering up to three years before doing the actual public offering.

Vishal Mahadevia and Niten Malhan, managing directors at Warburg Pincus India, were not available for a comment. “The firm is bound by internal operational policies, which does not allow discussion of its investment activities. Warburg Pincus is unable to share any views regarding your queries,” a spokesperson responded.

Parth Iyengar, head of research, Gartner India, said the move may not necessarily be indicative of the private equity firm’s exit from WNS. He said economic instability in western world may be forcing Warburg Pincus to look at monetising its stake in the BPO firm. “It must be concerned about the economic instability and so must be considering monetisation some of its shareholding in WNS before its value depreciates more.”

Generally, when an investor is looking to exit a venture the shelf registration is for offloading of major stakeholding and in a trickle like it was in the case of WNS, said Iyengar.

Once approved by the SEC, the shelf would allow Warburg Pincus, which is the largest shareholder in WNS holding 48% as of June 30, 2011, to offer and sell up to 2.14 crore ordinary shares or ADSs.

It will be up to the private equity firm to exit its entire holding in the company through one or more offerings.

WNS will not receive any proceeds from the sale by Warburg Pincus.

Keshav Murugesh, group chief executive officer, WNS, did not give away specifics related Warburg’s exit plans.

“The shelf will provide us the flexibility to sell shares as and when required to achieve our strategic objectives and fund our growth plans including capital expenditures, acquisitions and other investments in the business,” was all he conceded.

Interestingly, Warburg has been trying to exit its investment in WNS for a while now, but wasn’t able to, because of disagreement with the WNS management over the exit approach.

According to media reports, WNS was favouring Genpact, which was one of the largest bidders in a stake sale exercise conducted in the last quarter of 2009.

However, Genpact’s bid was in the form of stock and not cash while the PE firm (Warburg Pincus) was looking at the highest bidders offering cash in favour of their investment.

Coming soon: The Bellagio and MGM Grand at Bandra-Kurla Complex

This story first appeared in DNA Money edition on Wednesday October 12, 2011.

Mukesh Ambani continues to make inroads into India’s hospitality sector — after taking a stake in East India Hotels of the Oberois. A special purpose company promoted by Ambani and South Mumbai realtor Maker Builders is setting up two hotels — a Bellagio and an MGM Grand — at Maker Maxity in Bandra-Kurla Complex.

The company has signed an agreement with MGM Hospitality to manage and run the hotels. The Las Vegas Bellagio is known for its dancing fountains and high-end luxury suites. Its promoters say they are keen to merge Mumbai’s personality in the Bandra Bellagio’s architecture.

MGM will also bring in Skylofts, which are serviced apartments. DNA Money had first reported Maker Maxity’s plans to bring in the Bellagio hotel in June last year. The hotels are expected to be operational in 3-4 years from the time work starts.

Gamal Aziz, CEO of MGM Hospitality, said the location’s proximity to the central business district, the entertainment industry and affluent residents provides a perfect setting for the confluence of energy, indulgence and luxury that the hotels will bring to the destination. “It is a huge milestone in our strategy to extend our brand reach in the Indian hospitality market,” he said.

Officials of the joint venture did not respond to DNA’s mail. Calls made to Rishi Kapoor, vice-president — India development, for MGM, remained unanswered.

Google India to bring 500,000 Indian Small Medium Businesses online for free

Google India launched a nationwide initiative to assist small medium businesses in India to get online with a free website, personalised domain and hosting. Called ‘India Get Your Business Online,’ this initiative aims to break down the barriers that stop small businesses from getting online -- by offering a quick, easy and free tool to set up and host a website.

With this initiative, Google intends to help 500,000 small medium businesses in India to get online in next three years, working with web hosting provider HostGator.

Small business owners in India can logon to www.indiagetonline.in and use the tool to get a get a free, easy-to-build website and web hosting for one year powered by HostGator. Businesses also get a customised domain .in name and free tools, training and resources to succeed online.

According to union rural development minister Jairam Ramesh, "SMEs are the future business leaders of India and their growth is a priority for the UPA government and its policies. We want to see India's SMEs grow to become recognized Indian brands, and a presence on the Internet is absolutely essential for this. I therefore welcome Google's initiative in launching India Get Your Business Online for SMEs. This will help SMEs modernize their operations and reach out to more customers in India and abroad. Indian SMEs should make the most of such opportunities to establish their presence on the Internet. I wish this initiative all success."

Highlighting Google’s commitment to India, Nikesh Arora SVP & Chief Business Officer of Google Inc. said, “Google has always believed in the power of the Internet to help small businesses thrive and to make people's lives easier by making information more accessible and useful. We recognise India as a high growth and high potential Internet market in the world and we’re committed to play the role of a catalyst to bring the benefits of the internet economy to small and medium businesses in India. We have received tremendous response to this initiative in other countries and we’re very excited to bring this initiative to India and empower local businesses as more and more Indian users get online.”

While India is home to an estimated 8 million small and medium businesses, only about 400,000 have a website. The initiative is designed to bridge the information gap that exists online due to the lack of presence of local Indian businesses on the Internet. Businesses often believe that getting online is too complex, costly and time-consuming; this perception prevents many SMBs from taking the first step towards building an online presence. Google India and HostGator plan to change that through this initiative. In addition, HostGator will also offer free support in creating, hosting and managing the website for a period of one year without any cost through its toll free call centers 1800-266-3000.

“Small and medium businesses have been an important focus area for us and we have launched a number of initiatives in India to support SMB’s who are already online. By partnering with HostGator we’re changing the game - our consumers will benefit from having access to better information of local businesses, business owners will benefit as their customers will be able to find them easily - so it’s a win-win proposition for both. We’re investing major resources in this campaign to help as many businesses as possible to get online. We aim to get at least 500,000 businesses online in the next three years,” said Rajan Anandan, managing director and VP sales and operations for Google India.

“SMBs form a very substantial part of our global customer base and we are committed to offer world class service to Indian SMBs. With Google, we have the perfect partner and we are very excited about the opportunity this represents for small and medium businesses in India. We will do our best to help out business in India build their online presence and also offer 24/7 support through our call center,” said Taylor Hawes, Marketing head of HostGator.com.

India get your business online program is also supported by Federation of Micro, Small and Medium Enterprises (MSMEs), popularly known as FISME. FISME, the non-profit organization will work with Google India to help SMBs get online through direct customer outreach and events.

V K Agarwal, president, FISME said, “With Google search being the most preferred search service on both the desktop and mobiles in India, this initiative of offering free domain, dynamic website and promotional tools, brings unparalleled advantage for small businesses in India. FISME with its network of 730 MSME associations will help the Indian Small businesses to make the most of this opportunity and benefit from this program. It is going to be a game changer.”

Details of www.Indiagetonline.in website creation tool:

● Free: It’s free to set up your website. The domain is free for 1 year, and it’s free to maintain your website for 12 months.

● Quick: The website tool takes 15 minutes from sitting down to being found online

● Easy: You don’t need to be a tech whiz to get started. All you need to start is your address, phone number, TAN/CIN or PAN to verify you as a business

● The website is simple because customers are looking for simple information online

● If you want to make your website work harder, you’ll have access to steady stream of free tips and tools from the Getting Indian Business Online team and a free coupon of worth Rs. 2500 INR advertising trial from Google AdWords to help promote your site.

● Gives you your own .in domain

● You get a Google Apps account - free personalized email ids

● Other features include photos/logos, integration with social media platforms

● After the first year, SMBs can choose to pay a monthly pay-as-you-go to maintain their website using HostGator.

● At the end of the first year, they’ll have to pay a nominal charge if they wish to renew their domain name. They can cancel their website at any time.

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.

'Our target for the next five years is to have close to 2,000 play-schools in the country'

Prajodh Rajan

Prajodh Rajan, director – education services, EuroKids International Ltd, speaks about the company's decade long journey in the Indian market and the way forward. Edited excerpts...

Could you give us a brief overview of the pre-school business in India.
The pre-school segment is sometimes also referred to as pre-primary, kindergarten etc. But whatever the term used be, it by definition caters to children in the 2-5 years of age group. In India, this segment is largely dominated by the unorganised sector which is referred to as ‘aunty next door pre-school’ who operates a centre in her own house or courtyard and that’s where young kids were being taught. While it worked well as far as the care and welfare of the children is concerned, but didn’t make much of a difference as far as education of the children is concerned.

This is because while warmth and care could be brought easily it lacked the educational quotient required. When I say educational quotient, like primary or secondary school children, even pre-primary has some very specific goals that need to be met with and the ‘aunty next door pre-school’ setup wasn’t really able to meet this requirement as the person wasn’t qualified enough (in most cases) to be able to conduct it. That was the big gap branded / organised pre-schools have identified and are trying to make a difference here.

How has the EuroKids' business faired over the past few years?
EuroKids has completed a decade in this industry now. We started operations back in 2001 thereby bringing in the branded pre-school concept in India. It all started with just two pre-schools in Mumbai back then and today we are a nationwide network of over 812 such centres in 300 towns and cities across the country. The company has grown very aggressively over the years and the compounded annual growth rate (CAGR) for the last three years has been a steady 25%. We are pursuing rapid growth currently not only in the tier I cities but also in tier II and III cities of India.

Are you largely operating in the key metros or have established presence in Tier II and III markets as well?
Our presence predominantly has been in the metros i.e. Tier I and II, since inception. For example Bangalore as a city itself would have a network of 60 play-schools. Though we have branched out in tier III it would be correct to say that large proportion would still be in the Tier I markets.

Are there any plans to venture in the rural, Tier III markets as well? Is there a different model being followed here?
We do not have a rural model parse and the urban model in practice has been extended to the Tier III or rural markets with minor modifications in terms of suitability for a given town. So I have an urban model which is suited for a rural market.

What is the mode of expansion pursued?
Franchising is predominantly how we have expanded our business. Nearly 98% of our centres are through franchise arrangements and the balance (2%) is company owned and operated.

How have you priced the services in different markets?
Our Average selling price is fairly broad now that we have penetrated in the Tier III markets as well. While at the top end (tier I) market the ASP is around Rs 65,000 p.a. while at the lower end (tier III) the price is Rs 18,000 p.a.

Could you take us through some of the challenges faced by organised players like yourself in the market?
The market is currently unregulated and we are very much in support of regulations as we feel regulations will certainly help the sector. Its absence is only helping the unorganized operators as they can virtually open a centre any place, anytime with very little or no regulations of sorts. Having no regulations is detrimental to branded players mainly because of low entry barrier, there is tremendous competition not just from the unorganized players but also the branded operators. If you look at the market today, almost 90% is unorganised.

How do you see the growth panning out in the coming years?
I’ll be bullish on the way ahead mainly because the Tier III response has been very good. Initially there was this resistance for pre-school education but the scenario is gradually changing and people in those towns are starting to realize the importance of sending their child early to school. The whole concept had not sunk in till recently and with the emergence of nuclear families among other factors, we are seeing that tier II and III markets are responding positively to early child education. This is the key reason why I am fairly bullish at least for the medium term which in my opinion would be next three years or so. We are looking at either maintaining the 25% CAGR levels or possibly look to better the same in the coming years.

What kind of growth are you targeting say five years from now? How will you fund this growth?
Our target for the next five years is to have close to 2,000 play-schools in the country. In addition, we are consciously taking our business overseas. Taking the centres out of Indian borders has been a very recent foray for us. We have successfully established presence in SAARC nations in a very meaningful manner. In Nepal we have 10 EuroKids play schools, one in Dhaka (Bangladesh), we have just entered the Sri Lanka market with a master franchise and one in Gulf.

The international operations currently is a small part of the entire 812 centres but going forward we plan to very aggressively also grow the international presence. In some place it would be through overseas subsidiaries, while in others through master franchise arrangements. We might also look to appoint direct franchisees from the India entity itself.

The EuroKids business model doesn’t really require a lot of capital expenditure from the company as money is largely invested by our franchise partners.

What is the company doing to enhance its asset utilisation?
As for enhancing asset utilisation is concerned, we have taken various steps to ensure that the real estate is occupied with other activities post the pre-school sessions that get over by 2 pm. In this direction, we have launched new initiatives viz. the EuroStar Academy of Performing Arts where in the focus is on dance and we have tied up with Sandip Soparrkar’s ballroom dance academy. We should be launching this initiative across 100 centres in India in the first phase. Simultaneously we are also taking about theatre, other forms of art and similar such programmes. This approach, in a big way will help us increase asset utilisation going forward.

What is the size of the pre-school market in India?
The pre-school market in India according to CRISIL is a Rs 50-55 billion market and I think it’s a fairly decent assumption. The report further states that approximately 13% is organized and balance is unorganised.

What is the size of your business?
We are hoping to touch Rs 65 crore by the end of this fiscal i.e. March 2012.

What is Educom's role in your business?
In 2008, Educom acquired a 50% stake in EuroKids International and they are currently part owners of the business.

How is competition shaping up in this industry?
Competition is building up in the segment from not just domestic players but also international companies. I think the shift from an unbranded to a branded industry itself is a big development. More branded players in the business will help the cause because good quality education can then be made available to a large audience in the country.

Is consolidation anywhere on the cards as well?
 There is enough opportunity to grow organically and we are pretty far away from consolidation as of now.

Sunil Mittal’s next goal: To be a top-3 realtor

This story first appeared in DNA Money edition on Thursday, September 22, 2011.

Sunil Bharti Mittal, the poster boy of Indian telecom, is gearing up for a big splash in real estate.

The goal is to be one of the top three realty companies in India, and Mittal has set up Bharti Realty Ltd as the beachhead to achieve it.

Officials at Bharti Enterprises, the group mothership, were not available to share details.

Bharti Realty has started work on four projects including three mixed-use developments and a shopping mall in northern and eastern India. While residential developments are not a part of current activity, the management plans to enter the segment too.

Sources familiar with the development said Bharti Realty earlier focused on creating and leasing real estate for the Bharti group’s business operations in Delhi and the National Capital Region.

Among some of its existing developments include Bharti Crescent in New Delhi, which serves as Bharti Enterprises’ corporate office and Airtel Centre in Gurgaon.

The company’s 5 lakh sq ft mall project — called Pavilion — in the heart of Ludhiana is already underway.

The company has also acquired three assets to develop high-end commercial and retail space at the Delhi International Airport Ltd’s hospitality district / Aerocity near the new T3 terminal of the Indira Gandhi International Airport in the capital.

To be christened Worldmark, this integrated development is spread across approximately 1.5 million square foot and will be operational within two years from now.

The company has also acquired 6.7 acre on the Golf Course Extension Road in Gurgaon, where it will develop a shopping and office hub offering affordable and futuristic office spaces within an open and vibrant retail arena.

Christened Eldorado, this development will follow a mix of lease (for retail anchor tenants) and sale (for office and commercial space) model.

In Kolkata, the company is coming up with a 5 lakh square foot of mixed-use development in Rajarhat to be launched as Astra Towers.

Sources said Bharti Realty is currently identifying and negotiating for land parcels for similar developments across key Tier I and Tier II cities.

In Mumbai, the company is negotiating for a land parcel of around 20-25 acre, which is expected to be concluded in a couple of months.

Hoteliers tapping unconventional buyers for their assets

This story first appeared in DNA Money edition on Tuesday, September 20, 2011.

It all started in 2009 with Unitech’s 200-keys flagship hotel in Gurgaon, which was bought by New Delhi-based high networth individual Roop Madan, who is also a Tata Motors dealer, for Rs250 crore.

Since then, several high networth individuals and business groups from sectors like auto, petroleum, recruitments and telecom have grabbed hospitality assets, marking a whole new trend.

Among others, O P Munjal-led Hero group announced its foray into the hospitality market with the acquisition of a cold shell (unfinished hotel structure) at a strategic location in Gurgaon for over Rs400 crore, while Saudi Arabia-based Ravi Pillai, who is in the petroleum and recruitments business, acquired BSE-listed Hotel Leelaventure Ltd’s Kovalam beach resort for Rs500 crore.

Meanwhile, leading European telecom company Lebara Group also concluded a brownfield acquisition of a 190-key project in Chennai for an undisclosed sum and got on board the BSE-listed Indian Hotels Co Ltd to operate and manage the hotel under the ‘Gateway’ brand.

Indeed, as hoteliers, pure-play realtors and financial investors, including realty and hospitality focused funds, shy away from acquiring hotel assets, the sellers seem to be aggressively tapping the unconventional buyers, including HNIs and non-related business groups.

“Setting up hotel assets requires capital. While there are other capital sources available, their return expectations and investment horizon don’t necessarily match with those of the hotel assets. As a result, the funds are coming from HNIs and other unconventional sources with patient capital and the propensity that an investment in hotel asset requires,” said Sudeep Jain, executive vice-president - India, Jones Lang LaSalle Hotels.

Homi Aibara, partner and consultant, Mahajan & Aibara Management Consultants, seems to concur. “HNIs tend to pay a higher price as compared to strategic buyers who lay a lot of emphasis on the valuation of the asset and its strategic fit. As for reasons behind other business groups showing interest in this asset class is concerned, they have investible surplus and their return expectations are not as high as compared to a private investment firm/ fund looking at an internal rate of returns of over 20%. Business groups generally have a return expectation of 10-12% on such assets which is fairly achievable,” he said.

According to domestic and international property consultants mediating various hotel asset sale transactions, a number of hotel assets have been put on the block post the economic downturn of 2008, largely by real estate companies and a few others from the hotelier fraternity. Only a few deals here and there, like the acquisition of Dawnay Day’s hotel portfolio by hotels-focused fund Duet India Hotels got concluded.

Most of them are still in the market awaiting buyers as the valuation expectations are significantly higher than what buyers are willing to pay. However, going by the way hotel assets are being bought by a completely different set of buyers in the last few quarters, it is very likely the momentum will pick up going forward.

To cite an example, India’s largest real estate company DLF Ltd has been trying to exit its investment in luxury hotel chain Amanresorts International Pte, a chain of 25-odd boutique hotels and resorts it bought for $400 million back in November 2007.

According to recent media reports, LVMH Moet Hennessy Louis Vuitton is among some of the potential buyers of this luxury hotel chain. However, both DLF and LVMH have remained tight-lipped on this development.

Similarly, after selling The Leela Kovalam Beach Resort to Ravi Pillai’s Travancore Enterprises, the Nairs are believed to be now contemplating selling their soon-to-launch The Leela Palace Kempinski hotel in Chennai to the same buyer. Industry experts see it as a logical step as the company is trying to raise funds and reduce the huge debt on its books.

Another prominent seller of hotel assets is DB Hospitality, wherein the company promoters are mulling an exit from some of their operational projects including the Hilton Mumbai International Airport Hotel and Le Meridien hotel in Ahmedabad.

According to the company management, the proceeds could be used to improve the company’s debt-equity ratio.
Realtors and hotel owners in desperate need for money will be exploring possibilities with HNIs and other business groups to raise money... The strategy also augurs well with hotel companies pursuing the asset light strategy and focusing on their core which is operating and managing the business,” said an industry source.

On PE Street, exit doors hardly open

This story first appeared in DNA Money edition on Thursday, September 22, 2011.

The prolonged funk in the primary market has meant private equity players continue to stare longingly at the exit door.

With three quarters of the calendar year gone, there have been only 86 exits valued at $2.1 billion so far, about half the 174 worth $4.5 billion seen in 2010, according to data from VCCEdge.

Generally speaking, private equity firms head for the exit 3 to 7 years after investing in a company — with the most preferred route being initial public offerings.

Partha Choudhury, managing director, SEAF India Investment Advisors, a private equity firm, said the refrain in 2010 was that the optimism of the IPO market will continue into 2011, but that was not to be.

“As the year progressed, people realised that it wouldn’t make sense to take companies with just `100-150 crore turnover public. The IPO threshold was later identified as companies with over Rs250 crore in turnover with a potential for phenomenal returns. As a result, a lot of floats scheduled this year have been stalled,” said Choudhury.

According to VCCEdge data, of the 86 exits in 2011, 27 worth $633 million were through open market sales, and 22 worth $1,07 billion through mergers & acquisitions.

There were 14 exits through buybacks (company buying out the investor) generating $79 million, while only 12 were through IPOs which generated $78 million.

As many as 11 were secondary sales (private equity or venture capital firm buying out the existing investor) with an overall exit value of $241 million.

Consultants advising on exit strategies said the secondary market continues to be the preferred door.

Jacob Mathew, managing director, MAPE Advisory Group, an investment consultancy, said the current equity levels continue to offer great opportunities for secondary transactions.

“A lot of PE/VC investments are milestone-driven. There are times when the existing investor feels his investment milestone has been achieved and is fairly satisfied with the returns generated, he takes a call on exiting through the secondary route. This particularly happens with invested companies wherein the new investor is also able to achieve the investment milestone and return expectations. Once these conditions are fulfilled, it leads to a successful conclusion of a secondary deal,” said Mathew.

Very recently, MAPE advised Olympus Capital on a secondary deal wherein Olympus acquired Axis Private Equity’s (through its Axis Infrastructure Fund I) stake in Hyderabad-based Vishwa Infrastructures and Services for Rs240 crore, giving Axis over 4 times returns on its Rs60 crore investment (for a 35.6% stake) in 2008.

Sanjeev Krishnan, executive director - transactions group, PricewaterhouseCoopers, said exits this year will largely be a combination of secondary and strategic deals.

“Of the two options, secondary is certainly seeing more traction. Strategic sales as an exit strategy will be impacted because the markets in Europe and the US are not as buoyant as they were in 2010,” he said.

As far as the overall PE/VC exits momentum going forward in the current year is concerned, industry experts feel that the pace will be more or less the same with secondary transactions being the most sought after option for exits after M&A and open market sale.

But the broad consensus remains that sluggishness will continue in terms of exits because there are no data points indicating improving scenario.

Fundraising picks up among microfinance companies

This story first appeared in DNA Money edition on Thursday, September 15, 2011.

Investors are returning to Indian microfinance institutions (MFI), which faced difficulties in raising funds after the sector’s top firm, SKS Microfinance, faced regulatory scrutiny in Andhra Pradesh last year.

Andhra Pradesh had passed an Act in October last to stop microlenders such as SKS to collect dues from borrowers on a weekly basis and seek state approval for fresh advances, affecting prospects and fundraising ability of MFIs.

However, in the last few quarters, a few big-ticket placements have been made in microfinance companies by global and domestic investors, including at least three major deals since June, showing that investor confidence is being restored in the sector.

Ujjivan — a leading MFI and non-banking financial company (NBFC) — has received a funding approval of `100.50 crore ($21 million) from Sidbi and other public/private sector banks.

A week ago, Kolkata-based MFI Bandhan Financial Services Pvt Ltd raised Rs135 crore in private equity placement from the World Bank arm, International Finance Corporation (IFC). The deal, according to IFC, is its single-largest exposure in the Indian microfinance sector thus far.

In June, Bangalore-based MFI Janalakshmi Financial Services received `65 crore placement from investors led by Citi Venture Capital International. Among the few other players that managed to raise funds through the equity route is Delhi headquartered Satin Creditcare Network which raised around Rs100 crore ($22.3 million) from a bouquet of investors including $9 million from the US-based ShoreCap II Ltd and Danish Microfinance Partners K/S in December 2010 and February 2011, respectively.

Industry experts said that while SKS suffered mainly because of a large operations base in Andhra Pradesh, MFIs operating in other states have not been impacted so significantly. And after the Malegam committee report on the MFI sector, the Reserve Bank of India came up with its own set of guidelines which has helped instil some confidence and clarity in the sector.

Also, experts said MFIs like Bandhan, Ujjivan, and Janlakshmi raised money because they are different in their own ways.
Ganesh Rengaswamy, chief operating officer at the MFI-focused funding institution Lok Capital, said, “It could be the scale of operations, segment they cater to, transparency and customer satisfaction that are significant drivers for their fundraising. The second most important factor is their banking relationships and the confidence their banks or investors have in them or the individual promoters like Samit Ghosh (Ujjivan) and Ramesh Ramanathan (Janalakshmi).”

A few others feel the non-Andhra aspect also helped the MFIs attract equity and debt funding.

“There are institutions I am familiar with in AP which have scale and respectability but are still being looked at with some degree of caution when it comes to lending,” said a senior official from a leading PE firm.

Robin Roy, associate director, PricewaterhouseCoopers (PwC), said companies which have successfully demonstrated their ability and are operating efficiently will always be able to attract capital. “The better and more efficient players with economies of scale will have no issues accessing capital. Investors continuously keep looking at people with a good business model and a great performance track record,” he said.

Avinash Gupta, national leader - financial advisory practice, Deloitte Touche Tohmatsu I (P) Ltd, however, said a considerable portion of the funding being raised by the MFIs is debt.“It is more like a support to the MFIs because they do not have the ability to raise deposits. It would be interesting to see how the MFI story really unfurls in the coming years. There is a possibility that the MFIs may start functioning as pure-play NBFCs given the business prospects an NBFC offers are much more rewarding vis-a-vis an MFI,” said Gupta.

Update: September 26, 2011

Norwegian microfinance co. leads Rs 25 cr investment in Utkarsh's series B funding

Norwegian Microfinance Initiative (NMI) through its NMI Frontier Fund KS had led a Rs 25 crore series B investment in Utkarsh Micro Finance Pvt Ltd (Utkarsh). Intellecap was the sole advisor for this transaction.

The investment, according to Utkarsh senior management, will boost the company's growth plans. "It has come at the right time as the sector has started growing once again. Another important aspect is that all our investors have a strong bent for social sector and truly believe in double bottom-line approach. We strongly believe that this investment will facilitate further penetration of microfinance in the most underpenetrated geography in the country," said Govind Singh, MD and CEO, Utkarsh.

A registered Non-Banking Finance Company (NBFC), Utkarsh currently operates in 13 districts of Uttar Pradesh and Bihar. It has 56 branches, over 57,000 active clients and a loan portfolio of Rs 41 crore.

Henning Haugerudbråten, Investment Director, NMI Frontier Fund, said that NMI was attracted by Utkarsh's commitment to serving the poor in areas of India characterised by high population, high incidence of poverty, and very low financial inclusion. "The potential for well-run MFIs like Utkarsh to make an impact in this region is tremendous, and we believe Utkarsh has the professionalism and commitment required to make a difference and to achieve the joint mission of Utkarsh and NMI on financial inclusion, This investment is also an attractive complement to NMI's other activities in India," he said.

Aavishkaar Goodwell (AG), an existing investor in the MFI also participated in this Series B round of investment in the company. IFC, a member of the World Bank Group is also an existing investor in Utkarsh and has been supporting the firm since March 2010.

Anurag Agrawal, co-founder - Intellecap, and senior vice president of the investment banking arm, said, "This investment is a reinforcement of our belief that, in spite of all that has happened over the last year or so in the microfinance sector, there is still a fundamental business proposition for microfinance in India and informed global investors are willing to commit significant capital to quality institutions who are doing good work on the ground to serve the large unmet demand for microfinance services. We are optimistic that this space will see gradual growth over the next few years, as it adapts to a changed regulatory environment."

No kidding, pre-school business is a billion-dollar baby

My colleague Priyanka Golikeri is the lead writer of this story that appeared in DNA Money edition on Friday, September 16, 2011.

Every day, around 178 toddlers flock to a cozy little building located on a tree-lined lane off the main road at Basveswarnagar in Bangalore.

The walls of this building are painted in bright colours with pictures of animals, flowers and fruits. Inside the low-fenced compound sit a tiny swing, slides, see-saws, bicycles and a mini basketball court. The building has seven classrooms and a mini gym for the tots, who range from a year-and-a-half to four years in age.

There are eight other preschools in a 1-1.5 km radius around this one. Some of these are branded, while the others are run by neighbourhood “aunties.”

Still, demand is as strong as ever, says Suma Swamy, the coordinator. “Parents have started realising that this is a professional setup providing ample exposure.”

There is enough room for several schools to stand cheek by jowl, says a teacher at Little Crest, another preschool situated just behind Aarambaa EuroKids, who also goes by the name Suma.

Like in the Basveswarnagar area, preschools are sprouting within kissing distance of each other across almost every big and small city.

The scenario has changed a lot from a decade or so earlier, when preschools were still a nascent concept, say experts.

“When we started in 2006, we had just 10 kids. The number grew by four times the following year, and today we have 200 kids,” says Manjula K N, head (accounts & administration), Kara4Kids, a preschool chain having three centres in Bangalore.

Sumathi AR, a preschool teacher in the IT city, says earlier the idea was just to engage tots in a school environment in order to prepare them for the main school. “But today, the objective is also to educate them so that they are ahead of their peers in this competitive world.”

Experts say parents don’t think twice before spending as much as Rs30,000-50,000 per year for the education of their two- or three-year-old kids. Not surprisingly, some preschools have margins as high as 30%.

“The fees of good preschools start from Rs12,000 per year and go on till Rs50,000, depending on the city and location. Ten years ago, spending in thousands for the education of a kid who could barely walk or talk was unheard of. But today it is the norm,” says Sumathi.

No wonder then that estimates by Religare Institutional Research peg the preschool market in India at $770 million, and slated to reach $1 billion by 2016.

This $770 million currently comprises just 2.5% of India’s urban school going population.

“The potential is tremendous, not just from the metros but even really small places like Rudrapur, Tinjore and Yamunangar,” says Amol Arora, managing director, Shemrock Preschools, headquartered in New Delhi, with 130 preschools across India catering to 8,000 kids.

Shemrock aims to grow 20% every year.

Pritam Agrawal, director of Bangalore-based Hello Kids which has 137 preschools in 21 states, says the demand from small towns has increased so much that he is mainly looking at targeting places with 20,000 households.

EuroKids International, which has 812 centres in India, expects to grow at a compounded annual rate of 25%, says Prajodh Rajan, director, education services. “We want to have 2000 preschools in the next five years.”

Several factors contribute to this trend.Arora points to the increasing preference for all things branded. The spending capacity has also multiplied, given the booming private sector, particularly the IT sector, says Manjula from Kara4Kids, which has grown just through word of mouth.

Swamy of Aarambaa EuroKids says the organised players stand out for their curriculum and teaching methodology. “We take any theme and introduce different learning styles. If “fruits” is the theme, we explain by telling stories on fruits, holding puppet shows, taking the kids to the fruit market, bringing fruits to class, cutting them and asking kids to taste,” says Swamy, adding that this one concept goes on for a month and each day a different fruit is introduced. “Such a technique helps in better registration of the concept as the kid gets to touch, taste and see the fruits.”

Suma of Little Crest, which has five centres in Bangalore, says extensive training is provided to teachers on the teaching methodology as well as child psychology.

Also, most preschools keep a healthy teacher-child ratio of 1:10 along with a helper, a factor given importance by parents.

Despite being run in batches, as the operational time of preschools is less than six hours, several like Little Crest, Tree House Education have started utilising the space by incorporating daycare centres to mitigate the real estate expenses and rentals.

EuroKids, on the other hand, uses its centres for dance and theatre classes to increase asset utilisation.

Mumbai, Delhi hotels to hike room rates upto 67% this business season

An edited version of this news story first appeared in DNA Money edition on Tuesday, September 06, 2011.

Hotel rooms are set to get dearer between 4.76% to 66.67% as business season is expected to kick-start in a month from now. Despite concerns in the international markets, leading operators including the likes of Taj, Oberoi, ITC and Leela groups are hiking room rates across markets primarily in the key Indian gateway cities viz. Mumbai and New Delhi.

Independent data compiled by the writer indicated that best available rates offered by leading hotel chains are set to go up significantly mor so in Mumbai vis-a-vis New Delhi-NCR. The bookings being requested was for base category rooms on a single occupancy basis for a night's stay (in mid-September and mid-October) across 17 hotels hotels operated by Taj, Oberoi, ITC and Leela in Mumbai and Delhi hospitality markets.

The lowest increase in Mumbai is for base category rooms at The Leela Kempinski, Mumbai which are being offered at Rs 10,500 plus taxes in mid-September and Rs 11,000 plus taxes in mid-October showing an increase of 4.76%. The highest increase of 66.67% is with the rates offered by The Trident, Mumbai wherein the rate for superior room during the said period is Rs 7,500 plus taxes and Rs 12,500 plus taxes. Following suit is The Oberoi, Mumbai with an increase of 36% (Rs 11,000 and Rs 15,000 respectively) and The Taj Mahal Palace & Towers at 21.05% (Rs 9,500 and Rs 11,500 respectively.

On the other hand in Delhi, deluxe category rooms at The Oberoi, New Delhi showed the lowest increase at 13.33% offering rates of Rs 13,500 and Rs 17,000 – a hike of Rs 3,500. Indian Hotel Co's Vivanta by Taj Ambassador, New Delhi maintained its lead at 44.44% with the highest rate increase i.e Rs 9,000 vs Rs 13,000, an increase of Rs 4,000. Increasing from Rs 13,000 in mid-September to Rs 17,000 in mid-October, Taj Palace Hotel, New Delhi showed the second highest rate hike at 30.77%. The Leela Palace Kempinski, Chanakyapuri and The Taj Mahal Hotel, New Delhi followed suit with an increase of 21.43% and 20.69% respectively.

The Indian hospitality industry considers May to August months as off-season period while it is business season from October to March wherein business reaches to its peak in the last two weeks of December. The month of September and April are viewed as shoulder months wherein rates start heading northwards during September and vice-versa in the month of March. And beginning October, room rates across key hospitality markets and leisure destinations in the country will see an increase owing to increase in inbound travel coupled with increase in domestic travel with the advent of festivities and related holidays.

Echoing the sentiments, Noshir Marfatia, associate vice-president and GM, sales and marketing, The Park Hotels, said, Mumbai and Delhi are the two markets that will see substantial increase in the room rates this season.

"That's mainly owing to the market dynamics and the demand supply scenario prevalent in these markets. While new inventory in the NCR hospitality market may to some extent soften the rate hike depending on the hotel's profile, properties in certain pockets, for example, Greater Noida where F1 is scheduled in October will see a tremenduous increase in the rates going upwards of 60% to even over 100%. Similarly, there are other venues in Delhi-NCR that will witness events being hosted thereby creating a demand-supply imbalance which will eventually see hotel room rates going northwards,” said Marfatia.

The Bangalore and Chennai hospitality markets, according to industry players, are likely to remain flat though owing to increased inventory there. “Both markets especially Chennai will have to fight it out primarily on the occupancy levels as rates will continue to be under pressure. While 60% to 65% will be a good level to boast of during the business season, there is a possibility of minor uptick in rates once occupancies corss the 70-75% mark. We could then see a hike in the range of Rs 500 to Rs 800 across different properties,” said a top official requesting not to be quoted citing company policy.

The hospitality sector does not see the industrial slowdown having any significant impact on the business travel segment as well. “Industrial slowdown isn't much of a concern as we have experienced in the past that there is no immediate impact on the hospitality sector as such. However, given that we have entered the festive season wih Ganesh Chaturthi, followed by Durga Puja, Dussehra and Diwali, it is likely that business hotels may see some impact as travel will be skewed more towards leisure, holiday as compared to business. November will see a bounce back in business travel followed by another blip in December because of Christmas and New Year,” said a senior sales and marketing official from one of the four hotel companies being surveyed.

On the leisure travel front especially from the international markets, Marfatia is of the opinion that the segment is looking very healthy. “The only difference I have noticed is the fact that lead time for hotel bookings has come down from 30-45 days in the past to 10-20 days at present. A significant number or people are booking closer to their travel dates. The other interesting point is that, the overall number of days (international travellers staying in India) seems to be coming down to an average of 20-odd days as against 25-30 days in the past,” said Marfatia.

We only want to be part of best developments in India: Trump Organisation

This Q&A first appeared in DNA Money edition on Tuesday, September 6, 2011.

Known for creating landmark properties globally, Trump Organisation is now looking to tap the Indian hospitality market which is witnessing a tremendous demand for ultra-luxury real estate.

In an interview with DNA, Trump Organisation’s executive vice president Donald Trump Jr and executive vice president - development and acquisitions Ivanka M Trump elaborate on their plans while Trump International Development’s independent development consultant-India, Pranav R Bhakta, gives an overview of the company’s groundwork so far. Edited excerpts:

Donald Trump Jr

Why is Trump Hotel Collection eyeing the Indian hospitality market?

I have been to majority of the emerging markets and I am bullish on India. After visiting the country at least six times in the past five years, I have realised that our brand can add significant value to India. The increased global interest for India as a destination and growing number of high-networth individuals in the country translate into increased demand for ultra-luxury real estate.
The country is also experiencing increased development of iconic hotels and marquee mixed-use projects that are redefining cityscapes. With an increased appreciation for luxury lifestyle, the next natural step is to bring Trump Hotel Collection to India.

How is growth of Trump Hotel positioned in India and globally?

Last month we opened Trump Ocean Club International Hotel & Tower Panama, a 2.7 million-square-foot hotel and residential complex towering 70 stories, the tallest building in Latin America. Within two weeks it was completely sold out, breaking occupancy records.
By year-end, we will open Trump International Hotel & Tower Toronto, our second hotel outside the US. We are proactively seeking management contracts that are aligned with the company’s long-term strategic vision of operating a collection of iconic properties in key cities and resort destinations globally.
For India, this means a handful of hotels, likely ranging from approximately 150 to 500 rooms, depending on the market. With a level of customised service unrivaled in the market today and the ability to attract those seeking the modern day sensibilities of the next generation of luxury travel, we are positioned for continued growth at a consistent pace around the globe.

I understand that you have three verticals— Trump Hotels, Trump Branded Residences, Trump Golf. Also, as a part of Trump Organisation, you own Miss Universe, Apprentice (TV show). So will there be any cross-marketing forproperties in India?

We certainly cross-market across multiple platforms and create a buzz. We had the opportunity to showcase Trump Hotel Collection and two Trump Golf Clubs in the past season of The Celebrity Apprentice, which was aired in over 100 countries.
Trump golf course members and owners of Trump real estate are offered special promotions at Trump hotels. Over the next few years, Miss Universe will likely be hosted in international markets where we have Trump branded properties. We continue to identify unique opportunities to cross-market and will certainly do the same in India.

By when can we expect first property of Trumpin India? Will the India developments be primarily with asset owners with experience in developing hospitality assets or will you go with pure-play realtors with hotels/resorts as one of the assets in their overall real estate portfolio?

We have been looking at the market actively for the past five years. We continue to strategically review opportunities in major cities and resort destinations including Mumbai, New Delhi (Central), Bangalore, and Goa, and are working with local developers who carry strong track records to bring Trump Hotel Collection to the market. Selectivity is fundamental as we only want to be part of the best developments. Identifying hotel developers and pure-play real estate developers who share our values is a key component to bring the first Trump hotel to India.
We believe the successful execution of our marquee real estate projects and operation of our luxury hotels is rooted in relationships that are based on collaboration and flexibility.

Ivanka M Trump

How do you plan to place Trump Hotel Collection against the existing and upcoming luxury global brands in the country?

With decades of experience in developing luxury real estate across all asset types, Trump offers something other hotel management companies cannot. Most hotel management companies have pre-established development standards and are not comfortable moving away from a cookie-cutter approach to design.
We focus on ensuring that Trump Hotels are contextual to the city and neighborhood in which they are built. From inception, I work on selecting the best talent, and directly engage with the designers, architects and local consultants to create something unique.
Once open and operating we deliver innovative experiences and signature services and amenities, from exclusive restaurants housing celebrity chefs to our Trump Kids and Trump Pets programmes. There is also a certain cache associated with the Trump brand globally. People recognise the lifestyle we stand for and aspire to be part of it.

What is the nature of these developments - hotels, destination/resorts, serviced apartments, lifestyle properties including destination spa, golf course, mixed-use developments?

As an organisation, we continually focus on luxury condominiums, resorts, golf courses and hotels. However, the success of Trump Hotel Collection is extremely exciting and the preeminence of the Trump name in real estate markets around the world has provided us the opportunity to penetrate into the international luxury hotel and resort market.
A number of our hotels feature luxury branded residences; the golf course we are developing in Scotland will feature a Trump hotel on site; and most Trump hotels feature The Spa at Trump, which is distinguished by world-class facilities and an unprecedented level of luxury and personalisation.

What are your core strengths as a hotel management company?

Trump Hotel Collection ensures the highest quality product while maintaining the essence of ultimate uniqueness. We have raised the bar on the top-end travel experience with a style of customised service. Our personalised concierge, Trump Attache, is an example of our commitment to service. Trump Attache is a programme that dedicates an entire department to delivering uncompromising and individualised service to each hotel guest.
The programme is designed to create a sense that every hotel guest is a VIP and focuses on ensuring that no hotel stay feels like a first. Creating a sense of home is something that we are proud to offer to all our guests.

Which are the key brands you compete with in the current markets?

While Trump Hotel Collection offers a product re-imagined for the modern traveller, our competitive set includes luxury international legacy brands as well as independent luxury hotels. On a combined basis, Trump Hotel Collection properties are significantly outpacing the luxury segment’s global RevPar Index, which includes other international luxury brands that are presently enjoying success in India.

Pranav R Bhakta

What is your mandate as an independent consultant for Trump’s developments in India?

I serve as a liaison between India and Trump. I am focusing on sourcing opportunities in India for all three of the organisation’s real estate verticals—-Trump Hotel Collection, Trump Branded Residences and Trump Golf. The primary goal at the moment is identifying hotel management opportunities for Trump Hotel Collection.
I am doing business development in India, which includes educating local developers about Trump’s brand equity as a core competency, development capabilities and competitive advantages. I believe all three brands are well-positioned to enter the luxury real estate segment of India.

What kind of ground work have you done since assuming the role here?

Prior to starting my groundwork in India, I spent time in New York City with the Trump family and key members of the organisation to better understand their growth objectives for India. Over the past few months, I have been on the road throughout the country, spending most of my time in Mumbai, New Delhi, Bangalore and Goa meeting with legacy, institutional, and regional developers.
Till date, I have met over 55 developers, PERE groups and hospitality consultants, conducted many site visits, and I’m in various stages of negotiations.

What is the profile of hoteliers and real estate developers that you are in talks with?

Trump branded properties around the globe are known for their premier locations, landmark architecture and endless captivating views. Trump is seeking local developers that want to create the same standard in India that it has executed for the past 35 years.
Trump seeks developers that have the passion to redefine luxury, develop iconic buildings and, most importantly, have the desire to benefit from Trump’s experience in developing, selling and marketing luxury real estate. Trump brings unparallel experience to the table and is excited about developers that are keen on breaking away from traditional “India” construction methods to a more dynamic, institutional caliber — pushing the boundaries to deliver exceptional developments with unsurpassed levels of finishing and service.

What are the challenges and opportunities for Trump developments in India?

Opportunities are endless here. By blending core strengths in hotel, residential and golf, Trump has the ability to manage mixed-use hotel/residential developments and provide substantial reversionary value in the process.
Unlike other luxury hotel brands that require a hotel component, Trump can brand a luxury residential tower as standalone, manage a pure-play hotel, or it can blend all three verticals to create a true destination integrated resort with golf, hotel, and branded residential villas.
Trump Ocean Club International Hotel & Tower Panama is a fabulous example of a marquee mixed-use residential/hotel project that is operated by Trump. With 369 rooms, 645 branded residences, and over $400 million dollars invested, the project is the largest residential mixed-use property in all of Latin America.
Trump has added significant value to the development and marketing of the project, which is a world-class landmark and an architectural icon.