Retail – A New Investment Frontier

Retail – A New Investment Frontier

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IL&FS Investment Managers International Retail Overview India Retail Opportunity Financing the Retail Sector Approaching Private Equity
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IL&FS Investment Managers

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IL&FS

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Established in 1987 and headquartered in Mumbai Focused on the development of infrastructure projects and creation of value added financial services Presence across all sectors of Indian Infrastructure Promoted by leading global and Indian Banks/Financial Institutions Promoted over 50 Special Purpose Vehicle companies in the Infrastructure and Financial Services Space of which 2 are listed and are outperforming the benchmark indices IL&FS and its affiliates have over 1,500 employees spread across the length and breadth of India IL&FS developed assets provide services to over 50 mn people in India

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IIML Investment Managers
  IIML is promoted by IL&FS and is its private equity arm IIML is one of the largest Indian private equity fund managers in India with nearly US$900 million under management  Team of 20 experienced professionals operating from Mumbai and Bangalore  Made 60+ investments with a Gross US$ IRR of 26% p.a. on exited investments  50% of deals are proprietary in nature sourced by IIML’s own team and/or IL&FS Group
Contributors to IIML Managed Funds

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Funds Under Management
 IIML manages 7 funds with a combined corpus of around US$ 900 mn
South Asian AIG Indian Regional Apex Fund Sectoral Equity Fund 1996 1997 India Auto Ancillary Fund 1998 India Project Leverage India Fund Development Fund (LIF) 2000 2005 IL&FS, Punjab National Bank IL&FS India Realty Fund (IIRF) 2006 Fund Name Vintage

Primary Sponsors

IL&FS

IL&FS, AIG

IL&FS Auto Components & Growth

IL&FS

IL&FS

Sector Focus

Growth

Infrastructure & Growth

Infrastructure

Opportunistic Fund Life Insurance Corporation, PNB, IL&FS, Taib Bank, Banco Efisa, Evolvence 153 139 27 -

Real Estate CalPERS, CalSTRS, MacArthur Foundation, Oregon State Pension, GIC (RE), IL&FS 522 177 7 -

Key Investors

IFC, JBIC, ADB, IL&FS, SIDBI

Regents of California, Life Insurance Equitable Life IFC, DEG, Corporation, IL&FS, Assurance, Pantheon Mahindra & General Insurance Capital, ORIX, IL&FS, Mahindra, IL&FS Corporation HDFC 78 63 10 7 15 13 8 4 22 16 7 4

Corpus (US$ mn) Amount Invested (US$ mn) No. of Investments ** No. of Divestments

25* 36 26 9

* Evergreen Fund until 2007 ** Includes 3 commitments in LIF and IIRF

IIML also manages 1 propriety fund for IL&FS of US$ 56 mn
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International Retail Overview

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International Retail
 Retailing – Worlds largest private industry  Sales exceeding US$7.2 trillion

47 of the global Fortune companies and 25 of Asia’s Top 200 companies happen to be retailers

Top 30 retailers account for 19% of the global retail sales

Internationally Retail is a mature sector and organised players account for more than three-fourths of the total retail trade. Large retailers such as Walmart of US, Carrefour of France, Tesco of UK and others now dominate the global retail market

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International Retail
 Global retailers have adopted multi-format and multi-product strategies in order to customize their product offerings for distinct target segments

Sales and Market Cap of top Global retailers Company Walmart Carrefour Kroger Metro Sears Marks and Spencers
Source Bloomberg 19th July 2006

Sales US$ Mn 312,427 74,496 60,553 55,722 49,124 7,797

Market Cap US$ Mn 179,923 40,586 17,187 17,549 15,888 21,948

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India – Retail Opportunity

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Indian Scenario
 Demographics
     Population Population Growth Median Age Urban Population GDP Per capita (approx) : : : : : 1105 mn 1.6% 24.3 years 29% US$ 700

The spending pattern of the the emerging middle class is
Category (2004) Food, Beverage and Tobacco Clothing and Footwear Gross Rent, Fuel and Power Furniture, Fixture and Appliances Medical and Healthcare Services Transport and Communication Recreation, Education and Cultural Miscellaneous
Souce KSA Technopak 2005
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% Of Total 43% 5% 12% 4% 8% 15% 3% 10%

India Retail
 Retail in India is still at a very nascent stage with an estimated market size of approximately US$ 222 Bn The organised retail market currently stands at US$ 7.7Bn a mere 3.5% as of 2005 Asian economies have shown substantial penetration in the last 2 decades and India has still to move up

Oganised Retail Penetration

Penetration

80 60 40 20 0

75 55 40 35 30 20 1 7 3 Taiwan Malaysia Thailand Brazil Indonesia P oland China India

Countries
Source HSBC
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Risks of Retail
 The industry recognizes “its all about location” but needs to address other critical success factors – – – – – – Supply side chain management to increase productivity of inventory Overhead control which tends to balloon particularly in the early stages of growth Over crowding as evidenced by mushrooming mall development in metros and mini metros Technology Implementation helping in real time or at least end of day information transfer Recent influx in the retail sector has resulted in shortage of skilled and experienced manpower Customer Retention

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Financing the Retail Sector

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Financing Requirement
 Indian retail sector is highly fragmented with 12 million retail outlets spread across the country. 80% of these are run by small families using only household labor Organised Retail requires financing for – New Stores : Store Capex and deposits for store sites. The expense on this has increased over time as retail has gained importance and real estate cost has escalated – Existing Stores : Renovation and expansion of existing stores – Working Capital : There may be some retailers who require financing for working capital but this is rare as the majority get credit especially in case of food and grocery It is estimated that more than $3 Billion capex per annum is required to finance the growth of organised retail

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Financing Requirement…(Contd)
 The Question now is “Who will Fund the Big Retail expansion” – Private Equity – Capital Market – Indian Corporate houses – FDI in Retail Sector – Banks and Institutions India has emerged as the most attractive destination for mass merchant and food retailers outperforming China 2 years in a row according to global consulting firm A T Kearney Most of the developed nations are today showing signs of saturation and hence multinationals are looking at virgin territories to abode and expand the market

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Private Equity
 Indian retail is currently dominated by entrepreneurs, families and a few corporate houses

They are not used to the professionalism that this industry demands but are adapting and changes in the industry eg Pantaloon, Shopper’s Stop, Trent, Lifestyle, Subhiksha, Nilgiris, Trinethra, Fabmall, Vijay Sales, VLCC to name a few

Recent equity financing deals are
Company Pantaloon Retail Shoppers Stop Subiksha Trinethra and Fabmall Vishal Retail Crossword Investor ICICI Ventures,Bennett & Coleman IIML, ICICI Ventures and Zodiac Clothing ICICI Ventures GW Capital Bennett & Coleman ICICI Ventures
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Amount Rs 750 mn Rs 752 mn Rs 350mn Rs 450 mn NA NA

Private Equity …(Contd)
 Private Equity has helped to scale the landscape for organised retail over the years Growing awareness about this segment of financing with a maturing capital market has made access to funds easier The coming years may see a couple of landmark transactions in Private Equity Private equity is the most viable option for entrepreneurs and family held business as it helps to finance the finance the expansion of the business without the short term pressures of listing.

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IIML Experience
       Company Category Year of Investment Investment Amount Stake Current Market Price : : : : : : Shopper’s Stop Retail 2000 Rs 150 mn 4.24% Rs 498 Per Share

Through this transaction IIML helped Shopper’s Stop to gain a foothold in the organised retail market the benefit of which is seen today This transaction also gave IIML substantial returns Private equity is a tool that new and old business entrepreneurs can use who are currently at a nascent stage and would like to grow in a phased manner before tapping the capital markets

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Capital Markets
  Retail Companies are today looking at tapping the capital markets Capital markets in India have over the years strengthened and helped companies raise funds from the general public Transparency and efficiency Pantaloon had tapped the capital market in January for rights issue Private companies can access capital markets once they reach a reasonable size There are only 3 listed retail companies in India and the listing of a few more will help to build depth in the sector

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Capital Markets
 Retail sector has a long way to go till they are able to gain a sizable share of the capital market pie The Market Cap, P/E and performance of the listed companies are Company Market Cap Rs Mn 3,561 1,727 P/E CAGR Returns 3 Year or On listing (appox) 89% 29%

Pantaloon Retail Shopper’s Stop (Since Listing May 2005) Trent
Source Capitalmarket

60.2 63.7

991

40

54%

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Indian Big Business
 Traditionally the real estate players like Rahejas with Shopper’s Stop or the Pyramid could make an easy entry into the retail sector. Today, Indian business houses have shown a keen interest in retail – RPG : RPG which was the first group in India to spot an opportunity in the retail sector and having tied up with SPAR is set to go into an expansion mode – Reliance : Reliance is at the forefront of the retail foray. It plans to set up 1400 stores and invest $2.2 Bn in the coming years. – Birla : The Aditya Birla group is preparing a blueprint for claiming a share of the growing retail pie. – Bharti : Sunil Mittal promoted Bharti group is expected to enter the retail sector with an initial investment of around Rs 6,000 Crs. It is believed to be in talks with Tesco – Wadhawan Family : Promoters of Dewan Housing Finance has set up retail chain by the name of “Spinach”. The company is investing close to Rs 100 Crs in its retail foray

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FDI In Retail
 Government has realized the importance of FDI in retail and hence made the necessary changes To facilitate easier FDI inflow, instead of having to seek FIPB approval, FDI upto 100% is allowed under automatic route for cash and carry and wholesale trading and export trading The cabinet has allowed FDI upto 51% with prior Government approval for retail trade in “Single Brand” products Going ahead, the Government is expected to adopt a gradual approach to allowing further FDI in the retail space

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Approaching Private Equity

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Benefits of Private Equity
 Financial
– – – – Equity Quasi Equity Shareholders Loan Long term view

Managerial
– – Board Inputs : Industry Specialists, Independent Directors Investment Professionals with experience and knowledge of building business

Networking
– Global access to valuable group of people and skills

Helps in achieving success
– Providing risk management tools and ensuring high standard of Corporate Governance

Brand Value
– – The company gains a lot of brand value Helps when the company has to go for an IPO
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What Private Equity Players look For?
 Team/ Management
– – – Strong execution focused team Track Record, Skill sets, Organizational Chart Shareholding Pattern

Product or Service
– – – – Value to customer Sustainability of competitive edge Merchandising and supply chain management Discontinuous or Continuous Innovation

Market
– – – – – – Size of Market Demand Drivers Target Market Competitors Time to market Product Positioning
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What Private Equity Players look For?
 Business Model
– – – – Revenue Model Marketing and Distribution Strategy Differentiation Foreseeable Exits

Stage of Growth
– Early Stage or Late Stage

Capital Requirement
– – – Capital Requirement Equity Dilution Number of Financing Rounds to Commercialization

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Approaching Private Equity
 Business Plan – Include audited financial statements – Strategy Going Forward – Target Market – Current Customers – Executive Summary – Risks – Exit Due Diligence Package – Audited Financials – Merchandising and footfall Strategy – Location and property acquisition – Current Customers

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Financing Lifecycle

The Chasm Angels Founders Seed Capital Venture Capital Strategic Investors Early Stage

The Wall Public Markets IPO Later Stage Mezzanine C B Secondary Offerings

Revenue

A

Time
Valley of Death

Seed or Start-up: Market research and product development. Early Stage: Funding full-scale operations and selling products/services. Not yet profitable. Later Stage: Funding expansion and new products. Near break-even.

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