Evalueserve Private Equity Market in India Nov 2007

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Evalueserve, 2007. All Rights Reserved - Privileged and Confidential

November 2007

The Private Equity Market in

India


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Evalueserve, 2007. All Rights Reserved - Privileged and ConfidentialSlide

India: Strong Macroeconomic Outlook

Gross Domestic Product (GDP) of US$1,030 billion

12th largest economy in the world and 4thlargest in PPP terms

Real GDP growth of 9.4% in 2006-07

Current Snapshot

Current Snapshot

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 behindChina and the US

Projections 2020 - Comparison

Projections 2020 - Comparison

GDP of $1,030 billion during calendar year2007

Assuming real GDP growth rate of 8% peryear and an average of 5.5% inflation:

GDP of $1.920 billion in 2012

GDP of $5,040 billion in 2020

Projections - 2020

Projections - 2020


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107

71

299

146

56

110

518

60311

280

470

2,183

20 80250

500

1,160

937

1,650

7,460

591

0

50

100

150

200

250

300

350

400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NumberofDeals

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

ValueofDeals

(USDmillion)

Number of Deals Value of Deals

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

Private Equity in India The Story So Far

Source: Evalueserve, IVCA, Venture Intelligence India


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445

780

9401,030

13,500

16,300

19,500

23,000

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

2007 2008 2009 2010

NumberofDeal

0

5,000

10,000

15,000

20,000

25,000

ValueofDeal

(USDmillion)

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

Private Equity in India Future Outlook


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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 billionduring 2007-2020 including investments by hedge funds

Private Equity Investments as a Percentage of GDP (2006)

Countries GDP PE Investment PE Investment/GDPRatio

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%

India Lags The Developed Markets In PEInvestment Levels


7/19 Evalueserve, 2007. All Rights Reserved - Privileged and ConfidentialSlide

Financial

Services

4%

Medical &

Healthcare2%

Manufacturing

3%

Others

25%

IT & ITeS

66%

IT & ITeS Financial Services

Manufacturing Medical & Healthcare

Others

Engineering &

Construction

8%

Others

26%

IT & ITeS

28%

Manufacturing

18%

Medical &

Healthcare

10%

Financial

Services

10%

IT & ITeS Financial Services

Manufac turing Medical & Healthcare

Engineering & Construction Others

PE Investments in 2000 dominated by IT & ITES

Share of several other sectors esp. manufacturing, financial services, and healthcare increasingsignificantly

New areas of investment include Engineering & Construction, Textiles, Logistics, Food and Beverages,etc.

PE Investments in India Getting More Diversified

20002000 20062006


8/19 Evalueserve, 2007. All Rights Reserved - Privileged and ConfidentialSlide

Hi-tech Services and ProductsHi-tech Services and Products Domestic Services SectorDomestic Services SectorHigh-end Manufacturing and

Infrastructure

High-end Manufacturing andInfrastructure

Key Industry Groups to Look for

Includes:

IT/ITES

Drug Research

Clinical ResearchOutsourcing (CRO)

Engineering ServicesOutsourcing (ESO)

Telecom products andservices

Expected to grow atapproximately 22% per yearduring the next five years

Likely to contribute about1.3% out of a total growth of13% per year

Includes:

Retail

Travel and hospitality

Health care

Entertainment

Private education

Financial Services

Expected to grow atapproximately 19% per yearduring the next five years

Likely to contribute about2.7% out of a total growth of13% per year

Includes:

Auto/Auto-components

Electrical/electronic goods

Specialty chemicals

Pharmaceuticals

Gems and Jewellery

Textiles

Construction/Real Estate

Expected to grow atapproximately 19% peryear during the next fiveyears

Likely to contribute about2.5% out of a total growthof 13% per year


9/19 Evalueserve, 2007. All Rights Reserved - Privileged and Confidential

Private Equity Outlook in India

Risks and Opportunities in India

Best Practices for PE Investing inIndia

Presentation Plan


10/19 Evalueserve, 2007. All Rights Reserved - Privileged and ConfidentialSlide 1

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 marketsas 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 factorof five in five years whereas wages have only doubled during last five years.



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 refineryare 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



Percentage by Number and Market Capitalization of The Hundred Companies Comprising BSE-100

As of June 30, 2007 Percentage by Number Percentage by Market Capitalization

Public Sector Undertakings 16 24

Family run companies 47 46

Subsidiaries of Multi-nationals 23 20

Others 14 9

Opportunities in Family-run Businesses

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

& O i i i ll S i ff f



M&A Opportunities Especially Spin-offs fromLarger Companies..

Source: Evalueserve, Thomson One Banker

PE firms can either buy or help portfolio companies buy captive units likely to be spun off from theirparents

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 captiveeServe to Genpact

Currently this trend is prevalent in IT/ITES sector and is likely to spread to other sectors

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%



Private Equity Outlook in India

Risks and Opportunities in India

Best Practices for PE Investing inIndia

Presentation Plan



Find Diamonds in the Rough..

OpportunityOpportunity

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 ChallengesKey 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

Di if Di if d Th Di if Bit



Diversify, Diversify, and Then Diversify a BitMore..

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

N S b t E i i th I di



Slide 1

New Sub-sectors Emerging in the IndianEconomy..

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 compliedwith the maintenance norms

This work is currently largely outsourced to US and European companies

With the rise in the disposable income and greater awareness, wine gaining popularity in India andwine 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

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 amillion workers

Automotive Training Companies

Airline Maintenance and Certification Companies

Wine Companies



Slide 1

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 areheld up in courts of law or an unpopular public opinion

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

Examples of Sectors that can only Work in India


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

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Evalueserve Private Equity Market in India Nov 2007

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