The Private Equity Market in

India

November 2007

© Evalueserve, 2007. All Rights Reserved - Privileged and Confidential

 Presentation Plan

 Private Equity Outlook in India

 Risks and Opportunities in India

 “Best Practices” for PE Investing in India

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India: Strong Macroeconomic Outlook

Current Snapshot
 Gross Domestic Product (GDP) of US
$1,030 billion
 12th largest economy in the world and 4th Projections - 2020
largest in PPP terms  GDP of $1,030 billion during calendar year
 Real GDP growth of 9.4% in 2006-07 2007
 Assuming real GDP growth rate of 8% per
year and an average of 5.5% inflation:
 GDP of $1.920 billion in 2012
 GDP of $5,040 billion in 2020
Projections – 2020 - Comparison
 Real GDP growth rate 8% per annum (13.5%
including 5.5% annual inflation)
 4th largest economy of the world after US,
China and Japan
 3rd largest economy in PPP terms behind
China and the US

Slide 3
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Private Equity in India – The Story So Far

400 8,000
7,460
350 7,000
299
300 280 6,000
Number of Deals

Value of Deals
250 5,000

(USD million)
200 4,000
146
150 3,000
107 110
2,183
100 71 2,000
1,160 311
60 56
50 500 591 1,650 1,000
18 80 250 937
5 20 470
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number of Deals Value of Deals

Source: Evalueserve, IVCA, Venture Intelligence India

 First started in 1975 by Risk Capital Foundation followed by other domestic financial institutions
 After 1996, international VC and PE firms started investing in India
 Investments started surging in 2004

Slide 4
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Private Equity in India – Future Outlook

1,200 23,000 25,000

1,100
1,000 19,500
20,000
900
16,300
Number of Deals

800

Value of Deals
(USD million)
13,500 15,000
700
600
500 1,030
940 10,000
400 780
300
445 5,000
200
100
0 0
2007 2008 2009 2010

Number of Deals Value of Deals

 PE Investments of US $13.5 billion in 2007 to increase to US $23 billion by 2010

 366 PE firms currently operating in India and another 69 planning to start their operations soon
 US $48 billion already earmarked for investment during the next three and a half years

Slide 5
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India Lags The Developed Markets In PE
Investment Levels
Private Equity Investments as a Percentage of GDP (2006)

PE Investment/GDP
Countries GDP PE Investment
Ratio

USA $13,245 billion $191 billion 1.44%

UK $2,374 billion $42.3 billion 1.78%

China $2,630 billion $13 billion 0.49%

India $910 billion $7.5 billion 0.82%

 PE investment/GDP ratio in US/UK is much higher than China/India

 India already catching up fast, projected ratio of 1.3% in 2007
 Indian economy can easily absorb US $60 billion during 2007-2010 and as much as US $490 billion
during 2007-2020 including investments by hedge funds

Slide 6
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PE Investments in India Getting More Diversified

2000 2006
IT & ITeS Financial
66% Services
IT & ITeS 10% Manufacturing
Financial 28% 18%
Services
4%

Medical &
Healthcare
Manufacturing
Engineering & 10%
3% Others
Medical & 26% Construction
Others
Healthcare 8%
25%
2%

IT & ITeS Financial Services IT & ITeS Financial Services

Manufacturing Medical & Healthcare Manufacturing Medical & Healthcare
Others Engineering & Construction Others

 PE Investments in 2000 dominated by IT & ITES

 Share of several other sectors esp. manufacturing, financial services, and healthcare increasing
significantly
 New areas of investment include Engineering & Construction, Textiles, Logistics, Food and Beverages,
etc.

Slide 7
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‘Key Industry Groups’ to Look for…
Hi-tech Services and Products
 Includes:
→ IT/ITES
→ Drug Research
→ Clinical Research
Outsourcing (CRO)
→ Engineering Services
Outsourcing (ESO)
→ Telecom products and
services
 Expected to grow at
approximately 22% per year
during the next five years
 Likely to contribute about
1.3% out of a total growth of
13% per year
High-end Manufacturing and
Domestic Services Sector
 Includes:
→ Retail
→ Travel and hospitality
→ Health care
→ Entertainment
→ Private education
→ Financial Services
 Expected to grow at
approximately 19% per year
during the next five years
 Likely to contribute about
2.7% out of a total growth of
13% per year
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Infrastructure
 Includes:
→ Auto/Auto-components
→ Electrical/electronic goods
→ Specialty chemicals
→ Pharmaceuticals
→ Gems and Jewellery
→ Textiles
→ Construction/Real Estate
 Expected to grow at
approximately 19% per
year during the next five
years
 Likely to contribute about
2.5% out of a total growth
of 13% per year
Slide 8
 Presentation Plan

 Private Equity Outlook in India

 Risks and Opportunities in India

 “Best Practices” for PE Investing in

India

© Evalueserve, 2007. All Rights Reserved - Privileged and Confidential

Risks First...

 High volatility in Indian stock markets

→ Heavy dependence on short-term Foreign Institutional Investment inflows
→ Rich valuations: P/E ratio of 25 for BSE-100 compared with 13 for emerging markets
as a whole
 Currency fluctuations, which are making India less competitive to China. For example,
Indian Rupee has appreciated by 14.5% during Oct. 15, 2006 and Oct. 14, 2007 whereas
the Chinese Yuan has only appreciated by 5.4% (during the same period).
 Political risk: “Rules of the game” sometimes not clear
 Shortage of skilled workers especially in IT/ITES leading to wage inflation
 Indian economy heating up very quickly. For example, real costs have gone up by a factor
of five in five years whereas wages have only doubled during last five years.

Slide 10
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Opportunities in Public Sector Undertakings
(PSUs)
 Top 42 listed PSUs make up the BSE-PSU index and have a combined market cap
exceeding US $210 billion
 Impressive operational gains post liberalization (1991 to 2007)
→ Average revenue per employee up 10 times
→ Average profit per employee up 16 times
 Room for further efficiency gains – up to 60 percent in BSE-PSU companies and perhaps
more in other PSUs
 Recent investments from Actis in Punjab Tractors andfrom Mittal Steel in HPCL refinery
are recent examples of Private participation in state owned enterprises
Key Challenge
 Most PSUs are hierarchical and bureaucratic in nature, and do not like external advice

Slide 11
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Opportunities in Family-run Businesses

Percentage by Number and Market Capitalization of The Hundred Companies Comprising

BSE-100
Percentage by Market
As of June 30, 2007 Percentage by Number
Capitalization
Public Sector Undertakings 16 24
Family run companies 47 46
Subsidiaries of Multi-nationals 23 20
Others 14 9
Source: Evalueserve, Bombay Stock Exchange Website

 Overall, less than 1/3rd of family run businesses survive 20 years. Issues include:
→ Corporate governance
→ Good management structure
→ Long-term vision
 Can be a win-win for both parties if:
→ PE firm contributes strategy and operational expertise, not just capital

Slide 12
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M&A Opportunities Especially “Spin-offs” from
Larger Companies..
M&A Activity in Different Countries (2006), US$ billion
Countries GDP in USD M&A Percentage
USA 13,245 1,390 10.5%
UK 2,374 379 16.0%
Japan 4,367 113 2.6%
China 2,630 30 1.1%
India 910 39 4.3%
Source: Evalueserve, Thomson One Banker

 PE firms can either buy or help portfolio companies buy captive units likely to be “spun off” from their
parents
 20-30 companies likely to be spun-off in IT/ITES sector during 2007-2010
→ Trend started with British Airways and GE creating WNS and Genpact, respectively
→ Recent examples include Phillips selling its center to Infosys and Citibank “offloading” its captive
eServe to Genpact
 Currently this trend is prevalent in IT/ITES sector and is likely to spread to other sectors

Slide 13
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 Presentation Plan

 Private Equity Outlook in India

 Risks and Opportunities in India

 “Best Practices” for PE Investing in

India

© Evalueserve, 2007. All Rights Reserved - Privileged and Confidential

Find “Diamonds in the Rough”..

Opportunity

 22,000 for-profit firms with combined revenues of US $135 billion

 Most are regional and face growth challenges
 Most need strategy and operational advice in marketing and sales
 Valuations likely to be 10 -12 times earnings (Vs. 25 for BSE-100)
 At least one-quarter (I.e., 5,500) are likely to be winners in the long run

Key Challenges

 Finding these companies, lack of available market data

 Finding experts to do due diligence
 Convincing management about the PE value proposition
 Work with them in “the trenches” to improve operations, marketing and sales

Slide 15
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Diversify, Diversify, and Then Diversify a Bit
More..
 28% of PE investments in 2006 were still in IT/ITES sectors
→ Reflects natural bias of PE managers with mostly science and hi-tech background
→ Valuations of many companies running at 30 to 50 times earnings
→ Too many firms started during the last 3-4 years due to availability of cheap capital
→ A number of these “lemming” firms unlikely to survive over the next 2-3 years

 Within IT/ITES, there are still several unexplored sectors

→ Open Source
→ Robotics
→ Animation

Slide 16
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New Sub-sectors Emerging in the Indian
Economy..
Airline Maintenance and Certification Companies
 Currently there are 325 airplanes that fly domestically, expected to grow to 750 by 2010
 Airplane maintenance market projected to be US $2 billion in 2010
 Hardly any airline maintenance companies currently
 Currently there are no airline certification companies that audit and certify that planes have complied
with the maintenance norms
 This work is currently largely outsourced to US and European companies

Wine Companies
 With the rise in the disposable income and greater awareness, wine gaining popularity in India and
wine consumption growing at 40-50% per year
 Middle class getting hooked to Pizza and other fast food and hence need for refrigerated dough and
related aspects of supply chain, logistics and transportation

Automotive Training Companies

 Indian automotive industry is likely to face a shortage of 2.5 million skilled personnel by 2016
 E-learning company named Adayana has partnered with 38 auto firms to create curriculum to train a
million workers

Slide 17
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India is Neither the United States Nor China..
 PE/VC firms should invest in Indian companies “in their own right”

 India has very poor infrastructure and very poor governance record

 Just because a concept has worked in the US or China does not mean it will in India

 Because of democracy, many projects – especially those related to infrastructure –

are “held up” in courts of law or an unpopular public opinion

Examples of Sectors that can only Work in India

 Inverters (Back-up power supply equipment)
→ Current market size: US $1.2 billion (projected to be US $3 billion in 2010)
→ By 2010, there will likely to 2-3 firms with combined sales of US $1 billion and unique IP/products
→ These firms will be in great position to export to Africa and South Asia
 Mosquito Repellants
→ Current market size: US $300 million (projected to be US $750 million in 2010)
→ Quite likely that one company will emerge with US $250 million revenues

Slide 18
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Evalueserve Disclaimer

The information contained herein has been obtained from sources believed to be reliable. Evalueserve
disclaims all warranties as to the accuracy, completeness or adequacy of such information. Evalueserve
shall have no liability for errors, omissions or inadequacies in the information contained herein or for
interpretations thereof.

Slide 19
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